3 Groupthink Ideas in Today's Market

“Always bear in mind that your own resolution to succeed is more important than any one thing.”
-Abraham Lincoln

As Tiger Woods walked down the 18th fairway at the Bridgestone Invitational, Americans saw a man with undeniable leverage to his own resolution to succeed – that’s the kind of leverage you want to be long in this market.

In addressing his missing the cut at the British Open, he stated plainly: “I don't think as bad as everyone thought it would have been. You've just got to not have those bad stretches, just clean it up a little bit.”

Rather than take my financial advice, I suggest you start off this week and the end of the Q2 earnings season with Tiger’s “Just clean it up a little bit” – take all of your portfolio mistakes and look at them for what they are. Housing has bottomed; unemployment has peaked; and no matter where you go this morning, there you are.

On July 6th, when I posted our Macro Chart of The Week (posted every week to Research Edge Macro subscribers) and titled it, “Unemployment's Double Top”, I knew almost immediately how right I was going to be on calling a top in the unemployment picture. Why? That’s easy - no one, other than the math, agreed.

When no one agrees with you in this business, that usually implies some level of career risk. Luckily, I don’t work for anyone else anymore – and I can say what I think, whenever I want. This has proven to be a major competitive advantage in a Washington/Wall Street environment that is dominated by a generationally high level of groupthink.

Now that the market has absolutely smoked the Depressionistas' last hope for immediate term raging double digit unemployment and savings rates, what are the top 3 groupthink “ideas” I see in the market this morning?

1. China is a bubble

2. Inflation isn’t going to be a problem

3. The market is going up on low volume

Our take?

1. China: We have been China bulls since December of 2008, and in our recently published “China Black Book”, Andrew Barber outlined the probability of an initial -7% correction from the overbought highs. Last night, the Shanghai Composite closed down for the 4th consecutive day, taking the 4-day cumulative correction to -6.5%. We remain bullish on China, but at a price. This is not the time to call bubble, yet…

2. Inflation: In the immediate term, I agree. The USA will report another deflationary CPI number for July on Friday and will print another deflationary number for August (because, at +5.3%, the August of 2008 y/y compare was the highest report of the last cycle). In the intermediate term, America is going to see a major sequential ramp in reported inflation come Q4. Just in time for political football season as Bernanke plays defense for his year-end job security.

3. Volume: While that may have been true 1 month ago, we have seen a major sequential ramp in both daily and weekly volume studies. In May-June, the market was going up on low volume; now the up days are on accelerating volume. Looking at this past Friday versus the Friday of 7/31/09, I had volume up +28%. Not a bad day for the bulls! The chase is on…

I’ll let the bubble watchers deal with their rear-view strategies of suggesting China could drop another -7% tomorrow. In the meantime, I think you buy China on down days and sell it on up ones from here. I’m going to start focusing my attention more acutely to groupthink item #2 – the forward looking call on Q4 inflation.

When I was wrong on the high end of my Range Rover target, I changed my daily risk management strategy, immediately. With the exception of last week, where the US Dollar finally registered its first up week in the last five, the Buck has been Burning. Being wrong on the high side of my SP500 Q3 target was largely due to being right on the US government compromising the integrity of her currency at a more expeditious rate than even I thought possible.

From the MEGA Squeeze, to Housing’s Bottom, to Unemployment’s Double Top – those matches have been played. Next on this professional tour is Reflation’s Q4 Rotation. We’re looking forward to seeing competing opinions on the course. Bring your weather gear. When it’s raining out, we Macro guys believe you can get wet.

My immediate term TRADE target of resistance for the SP500 is 1,017, and I have downside support at 994. Buy low. Sell high.

Comments

[chap08:]

"America is going to see a major sequential ramp in reported inflation come Q4". This would be a major turn-around. The only way that the picture could change so far, so fast, is through economic strength and a slump in the dollar. That seems an unlikely combination.

Maybe I'm just a victim of groupthink.

Aug 10 10:51 AM

[PseudonymName:]

Keith,

I enjoy your comments almost on a daily basis but I think Richard has the correct call here.

seekingalpha.com/artic...

Aug 10 11:07 AM

[Mad Hedge F...:]

Here's another one. Welcome to the square root shaped recovery. That is the likely shape of the recovery curve we can expect over the coming years. If you back out what I call the “2000’s fluff” of excess car production, liar loans, using the home ATM for serial, annual refinancings, excess consumption, unneeded home construction to account for the new frugality, US GDP growth drops by 1%. Chop off another 1% for deleveraging in all its forms, including lower leverage ratios, the end of the collaterized debt markets and credit default swaps, ultra high junk yields, bond ratings for sale, and the new conservatism of CFO’s and auditors. That leaves you with a 1% growth rate that Japan has seen for the last 20 years. That means falling standard of livings, an unemployment rate permanently stuck at German style double digits, endemic deflation, a collapsing dollar, a comatose real estate market and moribund stock markets. Where are the 37 million jobs going to come from that American needs over the next decade? If your kid is going to graduate from college soon, or cash out from the army, he better start learning Mandarin.

3% Average US GDP growth rate 2002-2007
-1% Bank deleveraging
-1% 2000’s fluff-liar loans, excess home construction, excess car production
-1% real GDP growth 2010-2020

Aug 10 02:05 PM

[sabre_jenn:]

here is another example of group think:

CPI = inflation

Go check the BLS website, where they very specifically state that CPI is not and never was an inflation gauge. It doesn't matter how many people mistakenly use it as an inflation gauge -- it is not and never was.

Aug 10 04:21 PM

[Alphameister:]

Historically, Chinese stocks have traded at a P/E discount to U.S. stocks for a host of legitimate reasons. If my judgments about the respective growth paths of those two countries during the next ten years are reasonable, I can see that pattern reversing with Chinese stocks commanding a growth premium. Those calling this a bubble have not taken a close look at the values among Chinese equities, before and after that 80% advance. Such an advance over a short time frame does beg for a correction along the lines you suggest, but certainly not for the collapse so many are predicting.

Aug 11 04:46 PM