Market Pauses as the Stress Tests Loom

I must admit I did a lot of reading before starting tonight. Things are absolutely crazy out there and its hard to make sense of it all sometimes.

The market traded in a pretty tight range as it awaits the results of the banking stress tests. One thing that was interesting today was the huge volume. There were over 11 billion shares traded on the NYSE.

This action combined with the tight range tells you that the bears and the bulls are in quite a tussle right now as we head into the test results.

There are many rumors out there regarding the stress tests. SNL Financial is claiming that BofA and Citi need $54.8 billion and $71.8 billion of capital respectively. The Treasury supposedly has this figure at around $10 billion for each. Credit analyst Egan Jones reportedly believes that BofA may need $100 billion in new capital! Yikes!

The bottom line here folks is these estimates are a crapshoot. Trying to front run this news is a risky play if you are trading here.

Inflation or Deflation?

I am seeing so many conflicting signals around each of these in the market. I still believe deflation is the biggest risk.

The ISM number for April was much better than expected. However, this increase in demand has done nothing for pricing power:




My Take:

As you can see, prices continue to stay at very depressed levels which of course screams deflation. This is to be expected as the American consumer continues to recover from their massive credit binge.

At the same time, when I look at the markets I see lots of worries around inflation. China continues to buy massive amounts of gold. They now hold the worlds 5th largest stockpile. Could it be they are losing confidence in our treasuries and the US dollar?

I am also beginning to wonder if equities are also becoming a hedge for inflation. Are investors deciding that owning stocks is safer than piling up US dollars? This may turn out to be a wise move if the government continues to pillage our currency by spending like Paris Hilton on a shopping spree after a cocaine binge.

I have not come to any firm conclusions yet. Yale's Robert Shiller(whom I deeply respect) was on Bloomberg TV yesterday telling investors that they need to spread out their risks by buying stocks and real estate! This was an eye opener for me. When the man who helped create the famed Case/Shiller housing index makes this type of call on real estate you need to take notice of it.

BTW, the print article link that I included to Shiller's comments makes him sound much more bullish than his tone was on TV. He is still extremely skeptical about the economy and the market and believes this is just a bear market bounce.

Bottom Line

I guess my point here is the world of investing has dramatically changed. There are serious risks involved with anywhere you put your money in today's crazy world that we live in. This includes even cold hard cash! We are in unprecedented times.

Perhaps diversification into some hard assets with a short on the S&P 500 as a hedge makes some sense here. I am rapidly losing confidence that our government will defend its currency. The bailouts continue to roll and Ben seems hell bent on creating inflation.

The price action in the market recently tells me that everyone including the pro's are confused.

As a result, they are spreading out their risk and diversifying into many different areas. All you need to do is follow the money in the markets to see how this is all developing: At one point today everything was up! Gold, stocks, and treasury sales were all strong! The market is clearly dominated by two emotions right now: FEAR and CONFUSION.

The bottom line here is it might not be a bad idea to spread out some risk. Cash is still king in my book. However, going long a little gold and a few commodities like natural gas makes some sense as we watch the hit video "Government Spending Gone Wild". A small short on the S&P would be a nice way to hedge this bet.

Remember: Cash is king in deflation. Hard assets protect you from inflation. Protect yourself by owning both.