Thursday, December 9, 2010

Time to Take a Pause?

Let me start things with a chart of the S&P of the past 12 months:

My Take:

I think this chart is very interesting.  As you can see above, we saw a huge rally this fall as the market roared back to it's post crash highs.  What's interesting to me is it looks like the market is having a hard time breaking through to the upside since getting back up here.

Could we be hitting an inflection point where the trend reverses?  It's to soon to tell, but what I can say is if the longer the market continues to stall up here the higher the risk is to the downside.

I think the market is realizing there are many questions that need to be answered before marching higher:

Are the bond vigilantes going to take rates higher?

Are rates rising due to a strong economic recovery or rising deficits?

How bad will housing get hit if rates keep heading north?

What will this do to the banks balance sheets?

Will QE cause inflation or will the deflationary forces of a bursting credit bubble eventually win out?

Will unemployment continue to worsen?

If unemployment continues how will this effect the consumer?

Can Europe contain the Sovereign debt crisis?

If it can't will the Euro survive?

Will QE destroy the US dollar?

Can the Fed react fast enough if inflation hits as the currency weakens?

Take Continued:

Can you blame the market from taking a pause here?  The market seems to be running on fumes at this point given the risks I described above. 

I loved the two tech tickers below that discuss some of the same worries:

Take Continued

I couldn't agree more with the guests above.  QE2 is "criminal" and the fact that Bernanke feels he needs to go on 60 minutes and sell it makes me extremely uneasy.

Bernanke's point about being 100% in control of this situation is borderline delusional. 

How could anyone be 100% certain of anything given the risks above?  Some of the most brilliant hedge fund managers quit the game because the market became so uncertain.  How can this guy get on air and actually say something like this?

I mean just look at their history as the commentator above brilliantly points: The Fed has always been late in reacting to key "inflection" points over the past 15 years.  Their biggest mistake was holding rates down for too long which then created the housing bubble.  This will likely go down in the history books as the worst policy decision in history.

In fact, after looking at their history, I am 100% sure that they will be too late to react when this all blows up in their face.  God help us all when this happens.

The Bottom Line

The one thing you can count on right now is uncertainty.  The Democrats have now decided to not go through with Obama's idiotic tax cut deal(thank god). 

Let's hope the Democrats have enough balls to hold out long enough for a better deal.  I must admit I am skeptical because in their eyes they can't afford to not do anything.  The Republicans have time on their side because the clock is ticking and something must get done now.

If this thing gets strung out without compromise then my guess is the Democrats will end up eating the whole **it sandwich at the 11th hour before the critters go home for the holiday.  We will see what the bond market has to say if this is how it plays out.

In the meantime,  cash is king until we get more clarity around the economy.   As "the credit trader" told me last week: "Now is a time to sit on capital because bigger opportunities lie ahead". 

Remember, we are in the middle of a housing crash and we still have a long ways to go especially if rates keep rising.  This is the 1000lb gorilla in the room that everyone keeps trying to ignore. 

Every now and then he rears his ugly head, beats his chest, and reminds us how bad it really is:


Anonymous said...

I'm certainly enjoying the rise in value of my portfolio but when I stand back & look at this, I can't help but feel a few yrs down the road this all will implode on itself again until we correct the structural issues.
There is a good clip on featuring the Jon Stewart show regarding Uncle Ben's 60 min. interview. Check it out.

ManHands said...

"Jeff said... This is the 100lb gorilla in the room that everyone keeps trying to ignore."

Ironically, if he did only weigh 100 pounds, he probably would be pretty easy to ignore :)

Jeff said...


I think I had that 60 minutes clip up a few days ago.

Maybe he did another one. I'll have to check that out.

I share the same feeling that you do. The Fed is spending trillions trying to just kick the can down the road a few more years.

I don't think it works for that wrong but the timing of this stuff is always tough to predict.

Jeff said...


Yeah I forgot a zero there didn't I? Thats a pretty small gorilla:):)

I think I need to edit that