A Good Band Aide

economic bandaideGreen, green and more green. Will it ever end? Bulls came out swinging to start the week off, with the help of some more “perceived” recovering economic data that some have said is signaling a bottom in the markets. If you had watched CNBC this morning, it would have been impossible to tell that we are in a recession, as they must have officially decided not to report both sides of the economic argument anymore. Smart on their part by either GE or the government, who gave them the initiative to push positive sentiment onto beaten down investors across the world, as they are by far the single largest influencing factor in the market today. You don’t think the government has made a trip or two to talk to the executives at GE to discuss the sentiment shown on the network? Well, maybe it’s just me, but I’ve been around in the corporate world long enough to know that there exists plenty of fraud and manipulation. I just hope that investors do their own research when these numbers are released as well as earnings numbers, so that they are not so easily convinced from the rubbish that Larry Kudlow and Gang recommend on their morning shows. If Kudlow had been on the Titanic when it sank, he would have still been sound asleep while the ship was half under water.

No doubt the housing report was the big spark behind today’s rally, which shot the Dow up 215 points to inch so very close to that 8500 number. A 3% increase in existing home sales along with a slight .3% increase in US construction spending caused for most of this cheer on Wall Street. Of course such numbers have to mean that indeed the worst has come and we are on the road back up again. I mean, the duration of the recession has been about 17 months, which is about normal, so this all makes sense right? Well, that’s what many are saying, however, I still remain not that easily convinced.

I must give credit to those traders who have remained bullish this far into the rally, despite much of the downward pushing factors, as there are not many that saw this coming. I, myself, made some great profits riding this rally only until the first week in April, at which point I cashed out in fear of a near retracing. Afterward, I did not position myself strong on the short side, just took some smaller short positions, mostly of the continual fear I had of the possibility of more government intervention and manipulation. Indeed we have seen that come to pass and continue to come to pass. Even though it seems, for some, that nothing can put a stop to this upswing and that the days for bear’s profits are gone, I still remain ready for when this market decides to make a turn. Let me explain why.

First, the housing data. As I have said over and over again, there lies almost 0 significance when evaluating housing data on a month to month basis. Housing reports have some of the most seasonally influenced results out of all the economic data that is reported. Even though this is the second straight month of a positive month to month change in existing home sales, the year over year data continues to remain horrible. Only will several consecutive months of significantly changing housing data begin to effect my opinion of the current market. Let us not forget that Spring and Summer are the most popular times to buy homes and that combined with the recent large drops in housing prices, has caused for some traction in the housing sector, not to mention the many incentives the government is making for home buyers with all time low interest rates as well as tax credits to home buyers. The big question is, is it sustainable? I give more details of my opinion on today's premium podcast (subscribe here). You can see from the below chart, existing homes data is always changing and has sporadic ups and downs. It is the continual regression trend which is what you want to watch. Remember, the real estate recession in the early 90's lasted over 4 years with multiple bottoms.

existing home sales
Take any company that many of you may be working for at this point of time. I am sure, many of them are struggling with the current economic conditions and may have been forced to perform job and salary cuts, ask for a rent reduction from landlords, and have also maybe had to make some operational changes to survive in current conditions. If someone were to knock on your company’s door and offer them tens of millions of dollars in cash (or more or less depending on the scale of the company), and ask for nothing in return but to play by their rules, do you think your company would do it? I am sure most would at this point. As a result, it would totally change the look of your company’s balance sheet. Old bad debts could be written off, current expenses and payroll are able to made with flying colors, and next quarter’s outlook would begin to look much more brighter. But how long would that money last? If outside conditions became worse and worse, would it be sustainable?

I use this example as I believe it relates to what is going on in the banking system. Out of nowhere, banks have been blessed with mountains of cash. These new influxes do not need to be factored in on their balance sheet as a normal note would be. This is because the capital is coming from the mother ship itself(The Fed), who are allowed to expand and contract their balance sheet at will. The point is, after multiple trillions which have already been spent or announced to be spent this year alone, it is no surprise to me that we have seen some sort of traction in the market. Compare it to a drug induced high. People are able to escape the many pains of reality for a period of time, because of the injection of a hallucinogen. For a period of time, there is not a worry on the earth and everything feels right as rain. However, there comes a time where this high wears off, which is always followed by a crash or hangover. I compare our current times to one big high injected by the government. Either, our government keeps injecting us all with such doces of bailouts and TARP funds that we've seen recently, or we risk coming out of the high with one awful hangover.

So yes, I still remain a firm believer in the eventual collapse of these markets. It just may take some more time for nature to take its course. Investors can be fooled, but I only believe for a period of time. Volume is still remaining quite low, even on high moving days like today. It is very clear that big money has not entered these markets at this point and are still waiting for something. I think even many of the bulls are becoming skeptical about how much longer this rally can go on for. I said that I wanted to wait out the time until the bank stress test results were announced, which unfortunately keeps getting pushed back. I believe, that once we can sift through all of that mess, we will begin to see some opportunities on the short side. At that point, I will be ready with my capital, which I have preserved, in which I believe those that have remained patient will see a lot of opportunity on the short side. The real fundamental signs continue to be in bear’s favor, however, many of those are failed to be mentioned on many bull networks.

Many emailed me this weekend asking about my Lending Club experience, in which I have said before. I have had no delinquent payments on my loans I invested in and have still maintained my 10.5% return I sought out to receive in the beginning. So, no complaints here. I continue to remain patient and am only seeing more and more opportunities surface for me when the time is ready for the short side. Have a good evening, I’ll be on chat tomorrow, Happy Trading.

5 comments:

  1. oldschool Says:

    i agree with you completely. It just make me feel like waiting at a bus station that is not in service anymore.
    If the government doesn't want a crash, I guess they just print more money and we see green for a very long time.
    Meanwhile we see banks like WFC gaining 23 % a day!!
    That is close to the 3x ETF FAS. What is going on??
    I just can't go long against me believe. Too bad for me.
    GLTA

  2. McBalls Says:

    the legendary poker player doyle brunson was bankrupt before on a bad poker streak. he borrowed a small capital from friends and resumed his winning ways raking in dough aggressively many times over. there was no looking back.

    the thing about the banking system is that it's a winning business model as long as shove shit loads of money into their kitty. it's called the multiplier effect. and yes i'm starting to see borrowing and leveraging from institutions and high net worth individual but of cos not at those levels seen before the crash. interest is slowly coming back as more are getting convinced and in the midst of getting their investment board's nods to get a piece of this market.

    Smart money (hedge funds) has already been well positioned going into april after seeing the momentum build in march. The rest of the likes of mutual/pension/long-only funds are just starting to stir and play catch up.

    Last point. Notice volumes have been low on pull backs and relatively stronger and more furious on green days in the last 2 months. Of cos u can't compare with last year's volumes. the average fund is down 30% on average with another 30-100% in redemptions. plain facts.

  3. Jackson Says:

    McBalls, good points. Happy long investing. Invest safe. Always buy insurance.

  4. McBalls Says:

    Thanks Jackson. I intend to milk this bear rally till the very last drop!

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