Mr. Massive's  Instablog

• You know how they say the market rhymes? I think with increased volatility, we have shrunken 1933-1938 in half. We are admidst the 3rd leg down of secular bear, which started steathily in July. Nearer are we to May 2008, for a closer example. Which begs the following, why are we comfortable at being at a lower trading range then previously this year with better micro fundamentals? Because the macro environment is deteriorating.
  
  Be careful though, we can seesaw nauseatingly til what I'd like to call the KO punch occurs.  It can happen either way, but my nod goes to the bears.  At this point it will be hammertime.

BOLD, MASSIVE PREDICTION

1) Stumble to 1150 now, or continue rally to 200 MA of 1260, then fall to 1150.

2) Next, we rally back to 1200-1220 or 1260 if current rally continues to 200 MA.

This will take place in the next 2-6 weeks, depending on volatility. Possibility we go from 1-3, but i expect a bearish double top of this range to overlap current pole and flag pattern.

3)We get confirmation of European/Asian contraction. Market falls to 999 by end of year.
4)We fall to 750 by 3/1. Germans remain in Euro but use own currency. EUR/USD 1:1. This will act as my entry point to buy and hold.  I will be looking for the rare breed of growth/value/dividend.
5)We deleverage/face a period of deflation for 1-3 years. Pundits will declare that we never officially left the great recession, and call it a depression.  Markets will trade slowly, moving up in a choppy, linear fashion. During this time, we will fix our problems, not treat the symptoms.  It will be painful, but Americans are resilient.
6)Secular bear ends and secular bull is ushered in around 2016. The next big discovery is made (think internet) and inflection point for things like green tech's is made.
7) 4000-7500 SP 500 is reached by 2035.

Suggestions

I would remain heavily in cash, preserve capital, pay off debt, and add to savings. I do think that stocks will eventual decouple from overall indices.  Winners/ Losers will be separated, but I would use any extra capital to augment passive income.  Think Oil Rigs/ Cows/ small biz/ etc. Own tangible assets and PMs, not as an investment, but as a hedge.

WHY

I constantly mine data and rarely listen to pundits, pumpers, or bashers. Everything in my mind and heart has led me to the following conclusion. The Eurozone is wisely entering a stage of austerity.  They have realized to achieve sustainable growth, debt has to be reduced. Their contraction will be the first of many, in the global landscape.  China is cooling their engines and will shortly follow.  So will Japan per fragility, as well as other emerging markets (BRIC). The United States will be the last to follow, but after Q4. For the USA, the first quarter of contraction will be the Q1 2012, and recession will be concrete by the 2nd Q.

I think hubris has delayed our entry into the bear market. My theory of US contraction is not based on greed or fear, but reality. My theory is based on suffocation, thus will aptly call it the "Depression via Asphyxiation". We live in a consumer society that demands a weak dollar. Ironically, we have been brainwashed into believing a weaker dollar is good for the economy.  The merits of such destructive thinking will be disproved. 

We have systemic unemployment and lower wages. If the US economy is consumer driven, credit can't be extended to infinity, nor can we continue to bankrupt our savings. Futhermore, government the major contributor to GDP is making massive cuts. Something has to give...
My nature is one of endless optimism.  I believe that anything is possible and America is the greatest nation on earth.  However, reality can't be avoided forever.

Today

Flat, boring, and uneventful. Reminds me of my first girlfriend, when I was in my sophmore year of college.  JK, as big of a loser I am, I am not that big of loser.  It was in the 4th or 5th grade, and it didn't last, just like the flatness won't now. 

Dip buying was still in flavor...

After Hours

1) Alcoa missed.  .15 eps vs .22 consensus.  Guidance muted.  What i took away... "Strong company in a nervous environment." I expect the majority of companies to meet revenue and exceed earnings, but to lower future guidance.  They will say the same thing in different words... reassure investors their company is strong, but the macro environment is weak.

2) Slovakia, which has the GDP of my hometown, initially denied the EFSF from the Keynesian wet dream, unlimited money printing.  They will dissolve the government and pass the stupid bill later this week.  Political games aren't unique to the United States.  No rocket scientist, but debt with more debt sounds like a pretty dumb idea.  However, Europeans are great at kicking the can... (enter numerous historical examples here)

* out of the 6 companies reporting after today's close , 3 missed, 1 matched, and 2 beat.

Tomorrow

1) FOMC 9/21 meeting minutes are released at 1400 est.  I don't expect this to be of relevance.  I would hope by now that the markets realize we are facing economic headwinds on a global scale.

2) More earnings led by pepsi, info systems, and progressive.  Expect more of the same.  Some misses, some beats, some in line, but with a downside guidance.

3) France CPI, measure of inflation.  

If I had to guess

We go down about 1% tomorrow.  The market "should" turn over at the top of the range, approx 1200. I think we start lower, attempt an early rally, which will act as a pump fake, then turn lower for remainder of day, with a baby rally at end of day. When trading I combine fundamentals, technicals, and market psychology ( the amount of crack investors have taken).

Rest of the week

I expect risk to be off til GOOG and JPM report (thursday after close).  This may result in more of a fade than a fall. The market shouldn't digest Google's numbers, per they are a growth stock, in their growth stage peak, thus should grow.  Especially, since their search/phone share has increased.  I think Google is a wonderful company with great leadership.  If not for the high pps, no dividend, and being a growth stock in a deflationary environment, I would scoop up some shares. Now on to the "evil banks"

JPM, will act as a barometer. The embattled banking system tends to provide market direction.  I don't see too many ways, which their earnings call can be positive.  They face tons of scrutiny, increased regulation, occupying losers, and global debt.

I think it would be wise to remain in cash and perform little to no trades longer than a day/week. We are near the top of the range, and risk/reward suggest minimal upside reward vs downside risk. AKA 1200 in a 1220-1080 range is not where I want to initiate longs.  With that being said, the bullish bias still exists, with the so called experts calling for a fall melt up.  Seemingly overnight, all the risk that have plagued the market over the past few months have evaporated. Wouldn't suggest going short either...

With that being said, I own 80 SPXU $17 calls for an average of 1.1. I hold super majority in cash, with 5% hedge in gold.


On that Note

I'm hoping/thinking that earnings season will decouple stocks and sort winners/losers.  No longer will stocks ebb and flow with the overall market. Instead, they will appreciate/depreciate on their own merit.

Until next time, be massive,

MM