Hey Bulls: This Recession is Different

Good Afternoon Folks!

Stocks rallied over 2% today as the bulls continued to buy "fools gold". The denial by these bubbleheads simply amazes me.

Ironically, the buying spree that we have seen since Monday has been spurred by the announcement that we have been in a recession since December of 2007.

Why do I say this? Because all of the bubbleheads proceeded to take out the "recession" playbook after hearing this news. Bill Miller of Legg Mason pulled out the playbook today right on Que.

FYI: The playbook tells investors that you should buy stocks towards the end of the recession because the stock market always bottoms and moves higher before the economy gets out of the downturn.

articles like the one below continue to compare this to mild downturns:

"The economy jolted into reverse in the summer as consumers slashed their spending by the most in 28 years.

Many believe the economy will continue to shrink through the rest of this year and into the first quarter of next year. At 12 months and counting, the current recession is longer than the 10-month average length of recessions since World War II. The record for the longest recession in the postwar period is 16 months, which was reached in the 1973-75 and 1981-82 downturns."

My Take:

This type of article is disastrous for your average bull. I say this because they will all jump into stocks assuming we will be out of this shortly because we have already been in recession for a longer period of time than '73-75 and '81-'82. What they need to start realizing is this isn't a '73/'74 type event. This is a once in a century event that can only be compared to events like The Great Depression or the deflation spiral that occurred in Japan.

The bulls have gotten killed every time they have pulled out the playbook. They need to throw this book right out the window! Buying stocks thinking we will be out of this in 6 months is a fools game. What catalyst is there for getting out of this? There are no more tech/housing bubbles to blowup. I have yet to read one credible theory that makes me believe that the economy is about to make a dramatic turn.

In fact, the more I read the more "dire" I think things are!

Its time for the bulls to pull out a new playbook from the library. Its a book titled "The 20 year deflationary collapse". There are several versions available based on historic economic collapses from all around the world.

The bubbleheads need to start to realize that the market will not be moving higher anytime soon. The bulls continue to buy because they are so afraid of missing the next monster move that will bring us back to the highs. Guess what folks? Its not gonna happen. There will be some bounces going forward from time to time but it won't be anything that can be sustained.

DOW 14,000 was nothing but a fantasy. Our economy never grew to this level based on fundamentals. It was done by creating massive amounts of debt using 40-1 lending leverage. This lending leverage is now gone. Its now been replaced by 12-1 lending average. This changes the whole game folks! The bulls need to realize that stocks were not fairly valued at 14,000. They were extremely overvalued at these levels like the NASDAQ was at 5,000.

The assumption the bulls are now making is the market is "way undervalued" because we are 50% from the highs and the recession is about to end. Not so fast bubbleheads! Maybe you need to start assuming that stocks are now fairly valued since the leverage has been taken out of the system. Bill Gross stated this morning that DOW 5000 may be the new DOW 14000.

Bottom Line:

Its time that everyone starts to realize that the last 25 years was nothing but an anomaly that was created via financial innovation. Investors need to give up on the idea that we are heading anywhere near the highs that were set last year.

I think that some of the volatility you are seeing in the markets is the result of the average investor being totally confused. They are becoming filled with panic because nothing is working like its supposed to. What worked for 30 years no longer works anymore. The playbooks are broken.

Sadly, it appears that the bulls have not given up hope. We already know this because we have not seen capitulation yet. There is one more bullet left in the gun!

The recession call has now given them another excuse to use the last playbook and buy stocks. Let them run with it and the proceed to watch them fall off a cliff. As I have warned earlier, this could last until the end of the year. I will begin to start scaling into short positions as this rally fades. I picked up a little SRS but I decided to play small here. There is no reason to fight the tape and the bulls ability to ignore bad news recently is something to take notice of.

For example, the fact that the market shrugged off the ADP -250k jobs report today was pretty impressive. Lets see how the bulls react to the big jobs report on Friday. We all know this is going to be horrible. If the bulls stick to the recession playbook, the buying could continue. Be careful shorting into this report.

As always, keep an eye on the credit markets!

The fact that the 10-year in the credit markets is yielding 2.6% shows you how scared most investors are. When in doubt by treasuries. At least your money is safe there.

That's about the only playbook that is working right now.