If you’ve been following my Twitter/StockTwits stream lately, you might notice that it’s gotten rather dour lately. If you’ve been following me for a long time, the level of pessimism will be even more obvious as I am a bull at heart. It’s really hard to make money on the short side, it’s just a matter of math, a stock that goes from 50 to 25 gets you a 50% return, but a stock that goes from 25 to 50 gets you a 100% return, which do you think is easier? My point exactly.
So while I ran an absolute return long/short momentum strategy at Surfview Capital, and earlier learned how to think about markets in this manner at Geller Capital, the large swath of gains will always be made on the long side. It just pays more to be looking for bullish opportunities over bearish opportunities.
But, the first and most important rule of running money is, don’t lose money. And in order to keep true to that mantra, risk management is paramount. That means being realistic and sticking to your rules, even if that means staying in cash for a long time, or having to be bearish when all of the data tells you to be bearish.
Unfortunately all of the data is saying that it’s time to be bearish.
I am not a doomsday kind of guy, although I will admit that at times I truly do hope that Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are put into receivership. When I saw the news of Buffett’s investment in BAC Thursday morning I wanted to punch something (a banker would have been nice).
The charts are all set up technically for a longer term bear market. We had a classic head and shoulders top, and are now wedging out after a measured move on high volume. Go flip through your Edwards & Maghee, the technical analysis bible. Remember, technical analysis is not a crystal ball, it is an odds machine, it puts the odds of predicting the future in our favor and allows us to better manage risk, it is not a be all end all. The odds right now say we are headed further south, there’s no way around that fact. The charts in Europe are atrocious and look ready for another move to the downside sometime next week.
On the macro side, things look even worse unfortunately. Europe is starting to come apart at the seams, Germany and the nordic countries are quickly losing the will to deal with their European peers. Finland today said that it will not participate in the Greek bailout unless they get a ton of collateral (good luck with that). The rest of the nords are sick of dealing with southern Europe and I expect they will say no mas as well. Germany almost at the breaking point internally regarding doing this European bailout peace meal. It seems that Merkel is willing to go all in to support the Eurozone by in essence conquering Europe fiscally and politically, but the rest of the Eurozone countries aren’t about to hand over sovereignty and her own coalition isn’t thrilled with this idea.
So we’re left with this will they won’t they market. There is no other solution in Europe besides taking sovereignty from each nation and selling Eurobonds, none. IT’S THE ONLY REAL SOLUTION. Frankly I don’t think it’s gonna happen because Europeans, at their core, want to be different from each other more than they want to be the same. This is not the United States of Europe, they have no common purpose. If you think we have a fractured society in the US which wants different things and has different cultures, it’s 100X worse in Europe. The USE ain’t gonna happen, although it needs to.
The banking sector is, unfortunately, the heart of the economy, all of the blood must flow through it. Well, their are a bunch of very sick hearts in Europe due to the reality that they aren’t going to get 100 cents on the dollar for their sovereign debt exposure. Investors know this and there is a real risk that Europe, like the US in 2008/2009, loses its banking sector all together unless someone steps in.
Our banking sector in the US is at risk here as well, everything is connected. Bank of America is insolvent, yes, I said it, it’s insolvent. Do you really think that they were going to take 5B for a 6% note and warrants from Buffett if they were able to access the public capital markets? They had no choice, and they are still screwed, they need much more. Their balance sheet is a black hole of quagmires, no one has a damn clue what’s on it, and that’s how both they and the government want it. If you really knew what was hiding there, you’d want to hang yourself right now.
Remember, the market can deal with good news, it can deal with bad news, but market participants panic when they don’t have data. Shoot first, ask questions later. You can’t model a complete banking crash, so you go to gold and treasuries. The only reason we haven’t seen a 2008 like decline is due to the lower leverage from hedge funds and banks, for this we are lucky.
This is a dangerous time, we have very little in the way of good political leadership here or across the pond. We have very little good leadership in our financial sector. The technicals look bad and I have the feeling that the creditor nations of Europe are ready to pull the plug and see the chips fall where they may. If you think that can’t happen ... remember Lehman.