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On the 10th of March, as the deflation panic reached a crescendo, I wrote here on Seeking Alpha that commodity markets were pointing the way to an upturn, and diverging hugely from equities:
My overall view is that fears of economic Armageddon have been grossly exaggerated and that the US is in better economic shape than the merchandise exporters of Asia and Europe, whose economic models are doomed in the face of structural manufacturing overcapacity. The unprecedented global fiscal and monetary stimulus will gain traction in the next few months and generate a sub-par but real recovery, led by the US, in 2010...equities are now cheaper than for several decades on a cyclically adjusted earnings basis (and versus bonds) and stand at an extreme oversold level only seen a few times in the last century.'
Suddenly, as the bubble in bearishness was pricked, that became the consensus view. However, after the breathless surge from the lows, which has exceeded the average bear rally move over the last century, and which hasn't seen a typical base extension pattern or indeed any sustained pullback, markets now look vulnerable to a reversal. I've closed most long positions and am looking to play a corrective downside move. At 15x cyclically adjusted (ie normalized) forward earnings, stocks are hardly compellingly cheap, particularly given the very uncertain scale of this nascent economic recovery.
A key factor underpinning my positive view on the US economy was the windfall consumers were getting from collapsing energy prices and refi mortgage rates. But in the last week, both have reversed as oil hits $60 and the 30 year Treasury yield soars to 4.3%, both attributable to negative feedback from the extremely loose monetary policies the Fed is pursuing. The world is awash in oil right now, but in a zero interest rate environment, investment funds are back using commodities as an inflation hedge, in turn forcing end users like airlines to add to their balance sheet hedges, and collectively pushing gas prices back toward $3 a gallon this Summer.
The first and still tentative 'green shoots' have been enough to see implied 10 year inflation in the TIPS market jump to 1.64% from zero in December and a dreadful 30 year auction last week as the Treasury is now competing for limited global capital with more enticing opportunities in distressed corporate debt and equity refinancings. That $2 trillion 2010 deficit will be impossible to finance without vastly expanded Fed money printing, but that in turn will fuel inflationary fears and commodity speculation, particularly if the dollar begins to slide, as foreign money parked in the T-Bill markets gets repatriated.
A basic law of economics is that bad money crowds out good, and despite the near euphoric utterings of the usual CNBC cheerleaders (and any 'new bull market' call is a pure leap of faith on current evidence), we have seen a typical and predictable bear rally from panic lows. No more, no less. Any economic recovery faces huge headwinds from an ongoing consumer balance sheet deleveraging process that will take several years to unwind, and a US banking system which hasn't been reformed or rationalized with the fiasco of the Treasury stress test designed to preserve the dysfunctional status quo.
The scale of this rally hasn't surprised me given the 58% decline that preceded it, but its unusual nature in terms of speed, low and declining trading volume and short covering bias (exemplified by the 50 S&P stocks with the highest short interest rising three times faster than the 50 with the lowest interest since early March), suggest derisking your portfolio is now in order.
The massive divergence between value and growth stock performance over the past two months has not been seen since the peak of the tech bubble, and a retreat to well capitalized and safe yielding value areas like tobacco and utilities seems wise.
Poker, like investing, depends crucially on a keen awareness of probability, and the old saw that if you can't spot the mug at the table, it's you, is also apposite to markets. Hold or fold?
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I find this rally to be a once in a lifetime shorting opportunity. Well, twice in a lifetime - we've already had one fabulously profitable leg down, with a callable end.
And the opportunity is magnified by the low VIX (aMAzingly low, given circumstances), which means lower costs for options. Long duration puts here are a screaming steal.
Consumer spending is making a structural shift down, which will last for generations, until US industry starts making quality products and paying higher-inflation adjusted salaries. Savers are also being squeezed through the loss of interest income, their income is also measurably reduced.
US Economy hasn't seen the worst yet, as there still are people working for GM and Chrysler. Also the employment report is a fiction, with 75,000 census takers and 225,000 jobs created through the birth/death model. Real unemployment is more like 15%-20%
Soon more will join the unemployment rolls, and the Treasury will have to print like crazy just to lend money to the States to make the unemployment payments.
S&P is already within 15% of the top of this trading channel, and 950 is the big resistance number, we will see next week where we go after last weeks big advance. Down, down, down.
took about 4 months. it took till the end of the year to get another 100 points (march 12 to christmas) 9.5 months for 300 points to make the start of the bull market. we have now moved about the same 300 points since march 9 (3months). If something doesn't sound funny in this move to people there is something wrong with them. cetin you you have doubled your money in emerging markets in 3 months and are not going to take money off the table I feel sorry for you.
On May 10 09:57 AM JGL wrote:
> If there is a pull-back, my question is whether it will be only for
> equities (US and International) or also for commodities (oil; metals;
> gold; etc..)??
(I suspect the amiable Cetin is, in reality, a straw bull planted by bears in an effort to discredit the bullish case!)
On May 10 10:51 AM Alphameister wrote:
> I'm willing to credit this rally as the start of a new bull market,
> but I agree that it is time to become a lot more defensive in playing
> the near-term probabilities within an uncertain future.
>
> (I suspect the amiable Cetin is, in reality, a straw bull planted
> by bears in an effort to discredit the bullish case!)
So cetin got lucky, but it doesn't take away from the fact that he is hiding his history. the fact that after I pointed out the mistakes he has made and he took down the posts shows his true colors. like most fraudsters he can;t stand to have the light of day exposing him.
his posts and behavior are all characteristic of someone with a mental illness. perhaps some aspergers, narcissistic personality disorder, slight touch of either bilpolar or schizophrenia.
On May 10 08:24 AM fxmaven wrote:
> Cetin, one day I would like to hear a compelling argument why this
> "should be" a bull market. Corporate and Consumer Spending, are in
> free fall, and Gov't spending and money printing are almost exhausted.
> Even Chinese are demanding higher rates for holding treasuries.
>
>
> Consumer spending is making a structural shift down, which will last
> for generations, until US industry starts making quality products
> and paying higher-inflation adjusted salaries. Savers are also being
> squeezed through the loss of interest income, their income is also
> measurably reduced.
>
> US Economy hasn't seen the worst yet, as there still are people working
> for GM and Chrysler. Also the employment report is a fiction, with
> 75,000 census takers and 225,000 jobs created through the birth/death
> model. Real unemployment is more like 15%-20%
>
> Soon more will join the unemployment rolls, and the Treasury will
> have to print like crazy just to lend money to the States to make
> the unemployment payments.
>
> S&P is already within 15% of the top of this trading channel,
> and 950 is the big resistance number, we will see next week where
> we go after last weeks big advance. Down, down, down.
Feds may not be able to keep US$ negative, At All, if things keep going south in Europe - $ will show strength, simply because it will be the least badly managed of the large volume currencies.
JGL - I would say neither. The prices of both equities And commodities is based on the money supply, which means the credit supply. And that is doomed to shrink.
What factors made the leg down a "callable end"? and could you expand on your options comments as I am not familiar with them and their effects?
Any comments will be very helpful
Thanks
On May 10 08:12 AM Jasper M wrote:
> Good article.
> I find this rally to be a once in a lifetime shorting opportunity.
> Well, twice in a lifetime - we've already had one fabulously profitable
> leg down, with a callable end.
> And the opportunity is magnified by the low VIX (aMAzingly low, given
> circumstances), which means lower costs for options. Long duration
> puts here are a screaming steal.
So as you can imagine I'm very happy to see posts like this one on such a respected site (notwithstanding dcb's comment).
The question of whether an investor should "hold or fold" at this point has nothing to do with being the mug at the table.
It is simple, if an investor has been long for some or all of the rally based on an initial thesis, and that initial thesis still holds, then it is probably good to hold. If for whatever reason some or all of that thesis is no longer relevant then it might be time to fold.
Each investor in this rally may well have different reasons for getting long in the first place, so there will be different reasons for invalidating their respective initial logic for entering the market.
What factors gave a "callable end" to the downleg?
Also what effects do options have as I am not familiar with them!?
Thanks for any comments in advance
On May 10 08:12 AM Jasper M wrote:
> Good article.
> I find this rally to be a once in a lifetime shorting opportunity.
> Well, twice in a lifetime - we've already had one fabulously profitable
> leg down, with a callable end.
> And the opportunity is magnified by the low VIX (aMAzingly low, given
> circumstances), which means lower costs for options. Long duration
> puts here are a screaming steal.
On May 10 10:53 AM dcb wrote:
> the guy took down all his old posts on his blog so people could not
> really see how wrong he has been the entire time. then he shows up
> on a web site he never has before when he has been calling the bottom
> for over a year ( actually he was advocating buy at the peak and
> all the way down and never selling). therefore if he has been stupid
> enough to follow his own advice he has lost a fortune and been fully
> invested all the way down. (But, I don't think he really makes a
> living or really has enough money around to make a significant investment).
> having looked back over all the graphs on the S&P I can tell
> you this type of rally in this short of time I can't find.
>
> So cetin got lucky, but it doesn't take away from the fact that he
> is hiding his history. the fact that after I pointed out the mistakes
> he has made and he took down the posts shows his true colors. like
> most fraudsters he can;t stand to have the light of day exposing
> him.
>
> his posts and behavior are all characteristic of someone with a mental
> illness. perhaps some aspergers, narcissistic personality disorder,
> slight touch of either bilpolar or schizophrenia.
>
> On May 10 08:24 AM fxmaven wrote: