Wednesday, June 18, 2008

Major Imbalances Exist in the Market

I thought this writeup was really good. Has some of my basic thoughts in it which I have been worrying about.

I've learned a few things over the course of my career, three of which currently warrant particular attention. First, the reaction to news is more important than the news itself. Second, stay humble or the market will do it for you. Third, discipline must always trump conviction.

With those lessons in tow, I wanted to explore another topic, one that few people have a motivation to discuss. It's the risk of a seismic equity readjustment, a possibility that has much higher odds than most people currently foresee.

This is really incredible that I have been hearing this:

We often say in Minyanville, "as go the piggies, so goes the poke." The bank index has been a prescient precursor of the S&P 500 for many years. The fact that so many now expect a decoupling between the two only serves to reinforce the risk inherent in the relationship.


It's critical to remember that the stock market crash didn't cause the Great Depression, the Great Depression caused the stock market to crash. It was an era, not an event.

Yep again:

Perception is reality in the financial markets. If the collective mindset shifts from "the worst is behind us" to "we're between a rock and a hard place," the comeuppance will be swift.

I agree here to. In fact I think this will be the catalyst for the next big counter bear rally. Dollar will finally rise and oil will fall (probably dramatically) and the market will rise but for all the wrong reasons. A 10% to 20% move up in the markets just like you saw in October, January, and April is entirely possible before people realize that oil is falling because demand is plummenting.

Conventional wisdom dictates that lower crude and a higher dollar will offer an equity panacea. Allowing some room for a Pavlovian upside response, our take is that this is the biggest misperception in the marketplace.

Since the back of the tech bubble -- and contrary to stated public policy -- the lower greenback has been the rising tide that lifted all asset class boats. It stands to reason that when this dynamic reverses, equities will not be immune from the swoon.


Be that as it may -- and it may well prove true -- the greatest trick the devil ever pulled was convincing the world he didn't exist. I'm here to tell you that the imbalances not only remain, but also they're cumulative in both cause and effect.

I could not have said it better myself:

The key -- and the tenet that continues to be tested in this tape -- is the ability to manage risk rather than chase reward.

The market has the staying power, so remember that the mechanics of the swing will always trump the results of the at-bat. Capital preservation, debt reduction and financial intelligence remain staunch allies as we wade our way through these uncharted waters.

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