Monday, September 8, 2008

Day 1 comes to an end

I am about to head home and take a nap. I have gotten like 10 hours of sleep in the last 60 hours not counting some winks I caught on my flight. We completed day one which will be a several day process of the market digesting the GSE bailout. My whole goal was not to do much of anything if at all possible. You have to make the market serve you not vice versa. Any big responses by investors would be responding to emotion or guessing. I thought I might be forced to do something but was able not to make a trade today. The real surprise from a psychological standpoint was the temptation to short as the market started a semi sell off. Maybe we collapse tomorrow but I really don't think that would have been a smart move. I am still not sure we don't get some sort of sustained rally from this. 30 year fixed rate mortgages collapsed from 6.5% to 6%. CDS spreads on banks tightened. There is alot of reasons people can find to buy financials if they are a believer.

There are a couple of reasons I am slightly bearish on being bearish in the short term. One, everyone I heard or read today (and I have read and heard alot) except for 2 people, say this is a short term bounce and that it doesn't change anything. Unlike Bear Stearns where the world supposedly changed, all the commentary is saying that nothing has changed and maybe even got worse. I think that is wrong. I don't necessarily think this is a game changer and think that sometimes in the next six months will break the July lows in the S&P 500 but it does help and it does alleviate some systemic risk and financial pressure. The fact that everyone believes you should be selling the rally makes me uncomfortable to sell the rally. Not that I am buying (because I am not) but it is more tricky than it would appear. Basically the psychological aspect seems like it is possible that we could be in for a several week rally or month plus rally. Secondly the credit markets really did look alot better today. MBS spreads collapsed, CMBX and ABX spreads tightened, and as mentioned CDS spreads came in.

Let me be clear that I am not calling for a rally, I just don't think it is as an easy a call that we are going down or up as people are making it out to be. This bailout will have massive repercussions that are unpredictable, both good and bad. One "consensus" view that has already been proven wrong was that this would be really bad for the dollar. I argued with a couple of people over the weekend (at a wedding, I am great guest right) that I didn't think that was necessarily the case. Making big bets right now I think is merely guessing especially in the short term.

Bulls and bears went home today frustrated (been the case the last month). The bears felt like they had the bulls on the ropes about midday and bulls put together an impressive rally in the end. From a bears perspective, I would have rather seen a huge open and flat line then a huge open, a fade midday and then a retracement back to the highs for the day. If somehow the markets sells off hard tomorrow it might put it back in the bear camp. The bulls were counting for a bigger rally, did not like the fade midday, would have probably liked a little stronger volume, and definitely wanted greater market breadth.

Anyway, I am off to sleepyville. May be back with more today, may not. Overall I would say, don't be anxious. Digest what is going on with the market. There will be very few heroes that stay alive and many dead ones whose story will be forgotten.


Anonymous said...

you hit the nail on the head, this rally didnt like neither bulls nor bears. I am sure that this is still a bear market started in 2000 confirmed by looking at the price earnings that are too far from historic patterns. Timing is crucial. Gold and shorting stock markets are the best trade for the next 18 months. Gold bet is maybe a bit early as it is related to dollar in the short term.

Market Seer said...

Agree on the shorting the market. Less clear on gold. I have crossed over into the deflation camp and though I have a small position in gold as a type of hedge I am definitely not looking to add to it.