Despite the strength of the past few days this resembles trading in a Bear market rather than a Bull. We were up over 300 points at mid-day and have given almost half of it back already.
A bull market would trade up 50 points a day 5 days in a row.
My short term models are now very overbought and extended so we’re back into hedge mode now. Rather than using the SDS I bought the TZA which is more volatile but I found that we need the greater volatility to offset long positions. We’re in the TZA at a cost of $44.36.
Long TZA
A short while back I decided to return to writing on the blog as a way to encapsulate my thoughts and review tactics and strategies. With the noise that exists within our culture and data driven industry we can lose ourselves to the impulses caused by the most recent data points.
The talking heads on TV uniformly speak with such clarity and conviction but are never held accountable to the results of their recommendations. Do they eat their own cooking the way I do? I doubt it very much. So while you the reader may consider that this blog is for your benefit please consider its also for my benefit at well.
What do we know:
The political leadership existent within the US and Globally lacks the political will and savvy to solve the debt and currency crisis. There is a continual sense that their intentions are to “kick the can down the road” for future leaders and tax payers. The lack of cross the aisle cooperation between parties is pathetic. The Republican’s lack of cooperation, even at the cost of benefit to the country in order to gain the White House appears to be the game plan. Speaker Boehner is even disagreeing with the proposed short term tax credits proposed in the jobs bill.
If you’re a country that cannot print money then you are crashing. Why this is lost upon the tea party, I have no idea.
There is a global race to devalue currencies. PIMCO predicts the Euro will fall to 1.20 USD within three to six months. When Janene and I were in Paris this May the Euro was 1.45 USD.
2012 estimated earnings for the SP 500 are coming down in deliberate fashion. In August the estimate for 2012 was $112, now they are at $110 and falling.
Most European stock markets are down 15%-20% while the US is down 2% for the year. Macroeconomic data continues to deteriorate. Last night Goldman Sachs lowered their end of the year target for the SP500 to 1250 down from 1400.
Investors are extremely bearish. AAII figures show 40% bears against 30% bulls. This is an uncomfortable status in light of my hedged positions. The issues of Greece, the Euro, our budget impasse, US debt, falling currencies and high odds of recession appear to be largely baked in the cake of many share prices.
Shares of dividend paying stocks look very attractive relative to bonds.
Contrary to Bernanke’s talk: US money supply is rising. Rising money supply frequently has a steroid effect in the short term for stock prices to move higher.
With Peyton Manning on the sidelines is there is no doubt that Tom Brady is simply the best at his position.
What I don’t know:
How low will SP 500 earnings estimates fall before they bottom? The average recession cuts earnings by 25% from the previous peak or in our case $75 a share.
While a Greek default is inevitable, can Europe handle a Greek default in an orderly fashion, and then an Italy default, followed by a Portugal default……..rinse and repeat.
Will the Chinese support the Euro to allow multiple currency options for its growth.
Can the European banks reduce their systemic risks and raise gigantic amounts of capital they require?
One potential cure-all would be for the Chinese to let the Yuan trade freely on its own merits? Is this just pie in the sky hopin and wishin?
Will investors finally purge Treasuries en masse and allow yields to rise?
Is our unemployment issue systemic (see Doug Kass) or cyclical (Paul Krugman)?
Can the opinions expressed by Tim Geithner in stating there will be no Euro Lehman’s be trusted?
How can Duane Allman and BB King be ranked higher than Eric Clapton in the Rolling Stone Top 100 guitarists of all time. I’ve adored Live at the Fillmore East since I was a kid and Riding with the King is superb but shouldn’t the breadth of work by Clapton be considered?
Long Clapton
Shocking to me is the fact that the US remains one of the strongest markets in the world as of today, strong on a relative basis if not absolute. Despite the headlines and Euro risks the US markets continue to tread sideways. Either there is disbelief that Euro contagion risks will not suck us under and that the current decline in US earnings estimates will only be a shallow decline. Neither issue can be proven right now so my mantra of being defensive is still in place.
I’ve been using this minor market strength to add to defensive hedges (SDS) and slightly reduce market exposure. Charts remain broken with the SPX sharply below the 200 day moving average. I’m currently immersed in conducting research into the effects of using moving averages into our investment strategies.
This is not a good time for investors to act upon the urge to be contrary. While I’d love to be heavily invested in every portfolio, broken markets take time to heal. 2008 was a great example, while the crash occurred in the Fall it took six months for the 200 day m.a. to decline to a reasonable point, in addition the earnings were allowed to bottom and finally turn up.
There is no reason to fear bear markets when you take a proactive approach. For about 30 years I was almost exclusively a long-only investor. But getting kicked hard in 2008 was more than enough to turn me into a more flexible investor. When this bear finally expends itself there will be a major rally where returns will be stunning, but we must exercise one the hardest of disciplines: patience. Ugh.
Long SDS
Every time I question the logic of having hedges even after the decline in August I just remind myself that the issues in Europe have not resolved themselves. Regardless of some decent economic readings in the US and moderating inflation in China we still have the overhang of Greece and lock step in Italy.
The markets are now pricing in a Greek default which Germany will probably make good on. However, what happens if Italy follows? Will Germany still back them as well? And Spain?
Personally I don’t have the guts to cover shorts on today’s decline. The Murphy’s Law of investing dictates that Greece will default this weekend if I cover today. Hence, I’d prefer to cover on the markets reaction to a Greek default, that would be the textbook preference.
As for Obama’s jobs plan: DOA IMO. The Republicans know killing that any proposal that could solve our predicaments increases the chance of a Republican victory next year despite the long term harm. Makes one pine for the back room poker deals between Reagan and Tip O’Neal in the 80’s, where compromise for the benefit of the country was the priority.
I came across an interesting website this afternoon.
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Trading summary: I never closed out the SDS short since the peak was only $25 and change and I’m looking for a sale price in the range of $26.5 – $27. Way too much uncertainty existent now. While the Beige Book shows few surprises, perhaps the biggest being that the US is not slowing to recession speed just yet, its very close to stall speed.
Keeping a long term perspective: One day this period will have passed but until that time comes protecting capital for our clients is our primary objective. I believe that within six to eight months out we’ll be in line for a major market rally especially if US growth ekes out even small gains. I would rather miss these one day ramps and not get impaled on the ensuing sell-offs than risk an entire portfolio in the hopes that growth may return in small measure.
I’m waiting for the fat pitch to come down the middle of the plate before I swing.
Long SDS
