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3 bears at the door(mannfm11)

(2007-12-31 23:49:27) 下一個
Since I qualified myself as out of the loop, it would be a good idea tonot take me too seriously. But, going on, the next move will determinethe direction of this market. The longer we go sideways, the morelikely it is up and the stronger the move will be. We could be facedwith something like 1994 here if it is bullish, an entire sidewaysyear. The problem with this bullish read is what finished 1994 was theMexican crisis from what I recall. I don't think we finish on thebullish side here if the finish to the financial mess in 2008 is C orone of the big ones going under.

I think my point is to getbullish if the move is that way, even though it might be a whipsaw.Loss limits take care of that problem and you buy on weakness. Contra,you sell strength if the bear takes over.

I don't know howthis market has held up, but I have my theories. It appears that hedgefunds and the investment banks like GS have taken over the market tothe point that the public really don't need to be in the market foranything other than to feed the institutions and hedges. The PPT is GSand other Wall Streeters, not the Federal Reserve as is supposed. QQQposted an article by Henry Ck Liu out of the Asian times on Friday andreading the whole thing was a lot of work, but worth the time. Itappears that the hedges run this market by being short a basket ofstocks and being long another basket of stocks. They are leveraged tothe hilt and the market just don't move unless these guys need to getout. It is why on most days the market makes a move then just laysthere, as the move is the rebalancing of hedge fund trades and hasnothing to do with bullish or bearish. I guess these guys could laythere forever if the market would permit them to, but my guess is thatleverage has its price.

Thus, what we are really looking at isa question as to whether the big players need to raise cash or not.Explanation of the big moves in the summer were that the hedges had toraise money, thus buy back their shorts and sell their longs, whichcreated the imbalance that isn't supposed to exist in the market ontheir theory and make the heavily hedged short trades rise and theheavily long trades fall. Are these guys all in?

I am morebearish than I have ever been. The market value doesn't make sense andthe biggest bull nightmare of all is in full play, the melting down ofthe financial sector. Organizations and institutions putting money intothis group really don't understand that it will consume all and thatmoney put into banking no longer circulates when it becomes bankcapital. It only grows or vanishes over time. Thus, the $20 trillion orso to recapitalize the financials is high powered money that doesn'texist to fund debt repayment and purchases in the economy. If the bankscan leverage it forward, it is a huge injection, but instead it ismerely replacing what has already disappeared, thus averting asubstantial tightening of credit rather than fostering a lending boom.

Thebullish case is weak and the only bullish case that can be made is thatChina and India pick up the US and Europe and counterbalance them. Ifind this hard to take as fact because there are too many constraintsto growth and a lot of barriers to it. The main constraints are creditand commodities. I don't know that we have any kind of capacityconstraints per se in production other than the credit to fuel demandto utilize capacity and the oil to run it. Peak Oil or not, the worldoil supplies were developed to run a much smaller economy than is beingproposed at the present. Credit has to rest on the capacity of thesystem to actually service the credit in stock and to continue toexpand credit to finance unpaid interest. As long as housing worldwidewent up, this was possible, but to attempt to increase demand withcredit or even sustain it is like pushing on a string.

Thusthe stock market depends on what I call benign inflation, that clearsthe shelves but doesn't increase prices paid. We are beyond benigninflation and into the kind where it can only push up speculation andinterest rates. Thus the free ride of corporate profits is over and weare now only going to see a declining real return and a greaterinflationary return. It has been my experience in study that though ahedge, stocks don't keep up with inflation when it gets beyond benignlevels.

The bulls are now acting like there is pent up demandfor housing when the statistics show that too many people already ownhouses. This is what the subprime problems are about, the sale ofhousing to people that can't own the house. The percentage move fromroughly 65% of people owning houses to 69% is exhibit A of anunsustainable trend. Not only do housing prices need to move back tothe norm, but home ownership needs to move there as well. There is alot more to this picture than these 2 components, the changing ofmortgage underwriting guidelines and the very survival of the mortgageindustry, which is paramount. Historically, the housing business isn'tat a low, just at a low for the past 10 to 20 years. It can go muchlower and probably has to in order to adjust to a lower percentage ofhome ownership.

Thus we have 3 bear at the door, housing,commodities and financials. Exploding commodity prices prohibit thekind of loosening of credit that bulls are going to need to take themarket significantly higher. Imploding housing prices are going to suckthe life out of financials, which might not only make the economy notexpand, but prevent the fight against inflation and thus bottlenecks incommodities. We could have gas lines and should we have them, it willbe equal to raising the unemployment level by 3% to 5%, as that will bethe amount of time waiting to get gasoline. Should this occur in a freemarket, it will be accompanied by prices in the $5 to $6 range,basically destroying consumer spending.

I have a hard timebelieving that the oil producers and China step in and buy all thisconsumer stuff the US now consumes. High gasoline, restricted creditand a faltering economy isn't going to add up as bullish. I don't thinkit will be conducive to liquidty either and thus we will see forcedclosing of hedge positions in 2008 and the collar taken out of themarket. It will be one of the most bearish on record and thus, I willhave to play the sideways as a bearish continuation pattern.
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