Bullish and Bearish Themes Going Into 2011: Bearish Fundamentals vs. Bullish Intervention

|
Includes: AUNZ, CYB, DIA, FXA, FXB, FXC, FXE, FXF, FXY, QQQ, SPY, UDN, UUP
by: Cliff Wachtel

Bearish Forces: Losers Since March 2009 Despite Logic, Numbers

S&P 500 & Other Risk Assets At 6 Month or Longer Term Highs, In Strong Resistance Zones

Wildcards: Multiple Potential Sources of Bearish Surprises

EU Sovereign Debt & Banking Crisis: Some of likely sources of trouble in the coming weeks

  • uncertainty over Ireland ratifying needed spending cuts
  • Possible Portugal aid package
  • Additional peripheral EU nation credit downgrades (Ireland and Hungary this past week alone)
  • German resistance to comprehensive solution (read: bigger bailout fund or issuance of common Euro-Area Bonds that spread risk to all members)
  • Threat of restructure of one or more PIIGS debt burdens

US Real Estate/Banking Weakness

Ongoing sources of bad news include:
  • Rising bond rates (which mean higher mortgage rates) have already sent mortgage applications plunging. See As Rates Tick Up, Mortgage Applications Continue To Collapse
  • Unresolved foreclosure fraud scandal is slowing foreclosure process and thus sales of foreclosed properties, which were a major portion of existing US home sales
  • Ongoing FBI insider trading casts uncertainty over financial sector about which institutions will be implicated, how that will impact their businesses and regulatory picture going forward.

Potential China Bubble Burst

See numerous articles by Andy Xie and others, including:

Korea Tensions

Utterly unpredictable but no sign they are over. Much depends on China’s will to keep N. Korea in line.
Global Debt Reduction On National, Regional, Personal Levels
That means less spending by governments and households as long as the jobs picture remains stagnant.
Bullish Forces: Outnumbered But Winners Since March 2009
US, EU/IMF Stimulus And Market Support Moves
They’ve worked wonders thus far, highlights include:
  • Assorted stimulus like QE 1 and 2, tax cuts, Fed and ECB bond buying to keep yields low
  • Ongoing POMO and other short term market support moves
There is no reason to assume these and more creative manipulations will continue to prevent extended pullbacks for the coming weeks and months at least, barring a blow up so big it proves these methods have failed.
As long as these continue to work, no surprise that we see ECRI and other leading indicator measures turn up. Stock prices resisting deep pullbacks and bouncing on even minimal justification in the face of disturbing data. For example just this past week we saw most risk assets higher despite looming China tightening, a failed German bond auction, and uncertainty about US tax cuts and EU bond yields.
Net Predicted Result: Bloomberg reports a clear bullish consensus among economists for 2011, though there are those like David Rosenberg in "Before You Uncork The Champagne": David Rosenberg's 10 Themes For 2011.

Stocks, Bonds Suggest Risk Assets Will Prosper Going Forward

Both bond and stock market prices suggest better times ahead. The bellwether S&P 500 is at a new 52 week high, its best level since September 2008. Yields on German Bunds are back at Greek crisis levels of May 2010, same for benchmark 10 year notes and they are rising fast.

CONCLUSION
The clear lesson since the global debt crisis broke out in full bloom in early 2009 has been don’t fight central banks determined to support the bulls no matter how much money must be printed or the attendant risks to inflation or sovereign credit ratings.
The equally clear biggest question for the coming months: How long can they continue this behavior before risks of inflation or sovereign credit downgrades outweigh the benefits?
DISCLOSURE & DISCLAIMER: AUTHOR IS SHORT THE EUR, LONG THE CAD, AUD AND USD, LONG SELECTED EQUITIES HELD AS LONG TERM INCOME/GROWTH INVESTMENTS, SHORT THE OVERALL STOCK MARKET FOR HIS PERSONAL PORTFOLIO. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER