Monday, September 6, 2010

Musings Gathered from Connecticut

Back in Texas and hopefully will be in Texas for at least a month!! I love to travel but the last 45 days have been ridiculous. For Labor Day I was up in Connecticut for a wedding. Hung out with alot of Wall St types and heard alot of different thoughts about the market.

Last week was just brutal for the bears. A 5 to 6% move in a matter of hours over three trading days. Definitely many body bags being carried out. Right now I really have no idea where the market is going. I have a sickening feeling that last week may have started a March / April move seen earlier this year where the market just went up and up and up. There are many similarities between now and than.

One of the things that worry me the most is how bearish everyone is. Besides many of the sentiment surveys that are pointing to very high bearish levels, my conversations over the weekend confirmed as such. I am usually one of the few who are really bearish. Not so much anymore and it makes me really nervous. Unless the bearishness turns into a panic move down, it is very hard for the market to grind down with this many people bearish.

I also feel to some degree that the huge move down in equities I was looking for already happened, it just happened in the treasury market, not the equity market. The 10 year yielded around 2.45% towards its lows. It fell from 4% to 2.5% in a few months. That is A MASSIVE MOVE. That is telling you recession, deflation, and more rough economic waters ahead. The last time the bond market was yielding so little, the equity markets were around 750 to 800. The problem is the equity markets this time followed it down only a little bit. We didn't get anywhere close to 800. If the bond market starts selling off (and it already has, with 10 years now yielding 2.7% now) that seems to be bullish for stocks. You have many newsletters and market commentators (the real bears among us) talking about the equity markets collapsing and the bond market collapsing. That very well may happen but the correlation of how bonds move with stocks that has dictated market action over the last decade won't break down overnight. If the 10 year move back above 3% the likelihood is the stock market won't collapse to 800. The end game, probably a couple of years away if it occurs, sees the 10 year go above 5% and equity markets sell off hard. That is when the system collapses. This won't happen anytime soon and leads me back to sentiment. The sentiment really has gotten extreme with bonds. 98% of traders were bullish on bonds making it very very unlikely in my mind that the bond market is going much below 2.5% in the very near term. Now the equity market can lag. The top in bonds occurred January 2009. The bottom in equities didn't occur until March 2009. However, I feel like the circumstances are somewhat different.

Another problem for the bears is the elections coming up. Talked to a couple of investors this weekend who do not lean towards conspiracy theory type thinking but openly admitted that chatter is that the democrats are going to massage the economic numbers between now and the election. I did a couple of posts on why the ISM number on Wednesday made little sense and Friday's NFP number didn't much either. That could make it difficult for stocks to go down at least until earnings season. Then your betting companies will start warning about earnings.

There is still a story for the bears in the short term and that is Europe. European bond spreads have once again been inching higher and several stories over the weekend with how Greece is still likely to default. The Financial Times ran an article yesterday talking about how the European debt crises is about to enter a critical phase as the amount of debt needed to be raised in September is double the amount in August. Spain needs to raise 7 billion in Euros compared to 3.5 billion in August. So if your bearish and want a bearish catalyst I really feel like you have to be focused on Europe looking for something occurring across the pond. The problem with that is it the timing is always almost impossible to predict as it there are very few "leading indicators" for such events to occur and it should be once again U.S. Treasury bullish. The U.S. Treasury market could easily have another spike, but once again, it seems like the bond market needs to go sideways and consolidate for awhile at the very least.

Anyway, alot of things on my mind over the weekend. I am an extremely nervous bear right now. After such a violent move higher I am not sure there is much to do but the real question is if we retrace back to 1070 or 1080. Is that a chance to get out of some short positions or should one hold strong? One thing that came out loud and clear in my conversations over the weekend is that everyone hates this market. Nothing makes much sense. Stock pickers everywhere are pulling their hair out. So your really just forced to be right and remain solvent long enough to benefit. The big macro funds have left (lowered) their exposure to the equity market and increased in the foreign currency market. It is a brutal game and one that isn't typically long term accretive.

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