Friday, August 7, 2009

"Everything Else is just Noise"

"Its all about the Bond market.  Everything else is just noise." Dr. Saif K. Lalani, PhD (otherwise known to AEC readers as the Mad Scientist.)

The market is ALWAYS right.  I covered my shorts and got out of the way, but I gotta say that I am stunned at the power of this rally - especially during August after the best July in 20 years in the U.S. equity markets.  The crazy thing (to me, anyway) is that the Financials, Retailers, and Consumer Discretionary sectors were all up nearly 4%!  Who the ^&%# is buying that stuff?  Sorry, I forgot... the market is always right.

Perhaps the recession really is over, and the market is on its way to Dow 12,500 and S&P 1,200... and why not (Actually, I doubt it... but anything is possible)?  Markets overshoot all the time.  It is all about the U.S. Treasury market.

The U.S. Treasury has backstopped the banks, the insurance companies, Fannie Mae and Freddy Mac, GM-Ford-Chrysler, Wall Street, the Money Markets, my son's high school wrestling team, etc...  it then follows that the only thing that matters is the ability of the U.S. Treasury to continue to sell bonds (at favorable interest rates).

I am unable to go long U.S. equities even though they continue to rise (in my face).  I simply cannot see how the U.S. Treasury will be able to fund next year's deficit without some no- f&*^ing-around monetization (printing money to buy the debt), but clearly some very, very smart people disagree with me.  That's the problem with this business... you are reminded, and reminded often, what a dumb SOB you really are...

Still, I am sticking with my numbers.  The Mad Scientist so accurately pointed out some time ago that the rate of change in the employment situation would turn sharply - that the private, non-healthcare, non-educational part of the economy had already shed most of the jobs it possibly could - there are too few left to fire to move the unemployment rate up by much (because the real unemployment rate is NOT the U3 rate of 9.4% or even the U6 rate of 16.3%... it is at least several points higher having to do with the silly Birth/Death model and the way independent contractors are accounted for, not to mention other distortions).  

As much as the Dow 6500 created a great "Long" opportunity, it seems this rally will create a great "Short" opportunity for U.S. equity markets.  

I will be fleshing this out over the next couple of days, but I think that an opportunity to profit BIG is in the offing, and it will be from betting against the market.

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The US$ caught a bounce today.  Maybe it was started by the employment report... but I bet it carries through for a bit.  It better.

The 10 Year Treasury/S & P ratio is at a one year extreme.  I don't give specific trading advice, but you can figure out what I am doing from looking at those charts... 

Lastly.  I believe very, very strongly that this is a short covering rally.  This from seekingalpha.com seems to confirm my suspicions...

The 50 smallest stocks have outperformed the largest 50 stocks by 7.5%.

The 50 most shorted stocks have beaten the 50 least shorted stocks by 8.8%.
If you are approaching retirement, or need money in the near future for your child's education, or if you just don't want kill yourself for missing this opportunity, now is a good time to lighten up on equities.

Libertariananimal (at) gmail (d0t) com
  





5 comments:

bureaucrat said...

Mike Whitney (counterpunch.org) mentioned that the stock markets have increased in value by $2.3 trillion in the last 3 months, yet the money markets have dropped only $400 billion. The investment capital isn't coming from the sidelines. So who is indeed buying all this stock? The banks, apparently, with funding provided by the Fed to save the banks from their own bad debts. Bernanke washes their back, and they wash him back (yuck). This isn't sustainable. The markets may always be right, but I continue to believe there is no long-term "there" there.

Anonymous said...

To bet against the markets, you are betting against the feds... they usually win since they control the printing press :P

Donal Lang said...

The markets are always right? Maybe a free, open, not-messed-around-with market is right, but not this one. If the Fed print loadsa dollars and dump them into the banks, and the banks dump loadsa dollars into equities, is that still a 'right' market?

BTW, if equities (in dollars) go up 4% say, and the dollar goes down 4%, you may feel richer in your domestic market, but are you any richer?? Hmmmm.

Greg T. Jeffers said...

Bur,

I saw that, but that is a useless metric, unless I misunderstand it. If 300 houses sell in a community for$100k, and the 301 house sells for $110K, it only took 10k to drive aggregate market cap for the house up by $3mm.

Anon: The MS has often said that there has never been a circumstance of deflation direct to hyperinflation... but there is more to it here. I am starting to lay short bets out there (more than that I cannot say). Stay tuned, more later.

Donal:

For better or worse, if you are in my business the market IS always right. If I had stayed short, I would have damaged myself, and people don't need me to fight the market.

We all know that the market can be very wrong, but if you are forced to cover with a BIG loss, and have no capital left to be "right" with, it is all academic.

Greg T. Jeffers said...

Donal:

Please keep in mind that in reality there are no "constant dollars", only "nominal dollars". This is another way that the financial system - the banks and brokers - steal from the masses.