Saturday 16 June 2012

Irrational Exuberance?

Last Monday morning TNX (CBOE Interest rate 10 year note) opened at 1.63 and SPY opened at $ 134.17. This Friday TNX closed at 1.59 and SPX closed at $ 134.14. So basically SPY was flat for the week while the yield on 10 year fell another 3.5%.
Which also means, bonds and equities are moving in opposite direction once again. I have seen this many times and situations like these are not good for investing. While the bond market, which is way bigger than equity market, is worried about deflation and uncertainty, equities are showing exuberance expecting another QE. For equities, bad news is good news. That if things get bad enough, central bankers will come in with more free money. It is not a rational thinking for growth and prosperity. Japan is an example where Nikkei fell from 38000 to 9000 and like a bug in search of a wind-shield; Japan will possibly default before Europe blows up.

So what are the options we have before us? Greece is caught between the proverbial devil and deep see. If the Greeks decide that they will continue to remain debt slave for some more time and elect the same political parties which are responsible for the mess in the 1st place, then there is no need for action from the central banks. Do equities go up further from here? If status quo is maintained, will Bernanke come out swinging on June 20th with QE? I have my doubts.

On the other hand, if Greeks decide to try their luck with the new hooligan and ditch Euro, (which I don’t think they will. They want their cake and eat it too. Most of them want other Europeans to pay for their debt)   there is no limit where the ball will stop rolling. Is Europe ready to call the bluff? It is a game of chicken and do we want to bet our capital on the outcome of it?

The Spanish bailout did nothing to improve the market confidence and unless there are few trillions thrown to the bon fire, it will not budge. Either way, we are screwed. It is just a question of time. I expect that the politicians and central bankers will try till it does not work anymore. You just saw what Obama just did to buy the Hispanic votes. With a stroke of a pen, he changed the definition of what is legal and illegal. Why do you think he will not pump the stock markets when the 401K of the voters is tied to the stock market? The Banksters have got the politicians by their short and curly. With each fall in share value, comes more money at ZRIP. These guardians of American freedom, TBTF banks, borrow at 0%, buy 30 year treasury and get return at 4% and give back the same treasury to the Fed as collateral.  Take few trillions of dollars, do this circular trade for few years and you are guaranteed of huge bonus and you are a genius.  Banks are healthy again even when the assets they are holding are all rotten and valueless. That is why they changed the FASB rules in the 1st place.

How we trade and invest in such environment without losing our shirts is the challenge of our lifetime. That is why I keep telling that “Cash is King”. It does not matter if the equities go up or down for one day or for one week. So long we do not have a sustainable trend, it is better to stay out. That is the reason; I am staying out of the market till June 22nd no matter how high the market goes. I stayed away from shorting the market when SPX broke 1284, 200 DMA and told everyone who cared to listen, not to short.  And this is my advice now. Just don’t do anything and wait for things to settle down. I may be wrong and may be too cynical but I have seen too many bad things and I can feel that the end game has started. Better be careful than greedy.  

At least I do not have any anxiety over the outcome of some stupid election. Greece has defaulted many times in the past. In fact it was the 1st city state to default on its sovereign debt. So another Greek default will not be the last. Nor for that matter a default by Spain (16 times in History, much more than Greece) or France or for that matter US of A. Don’t be surprised, American has defaulted six times in its History and will do again in future. Only the form of default will change.  You can read it here: .  So let’s enjoy the beautiful weekend with family and friends while we can. Life is too short to chase useless stuff.

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  1. I think QE, Euro elections, Obama election, fiscal cliff, etc is just a bunch of noise to distract people. More importantly and what does not get discussed is SPX earnings. SPX profits are back to and even higher than 2008, which means they are at all time highs. SPX earnings always revert back to the mean, which is a long way down from here. The question is when does that happen. We are 12 years into a 15-20 secular bear market. Within that period we might be or soon will be completing this 3-4 year cyclical bull phase inside the 15-20 bear. A stonger USD will impact earnings, the earnings cycle is long in the tooth considering we are in a secular bear, and we have just too much supply in the market. The canary in the coal mine should be the FB IPO or Bernanke's ownership of UST market. What also leads me to believe we are close to the end of the 2009 rally is oil. All the QE's and LTRO have pushed the price of oil to un-natural price levels over the last 3 years, culminating is a small spike earlier this year. Most recessions are pre-dated with a spike in oil prices. The central banks have been center stage for 3 years. The #1 student of the great depression will be taught (I hope) some new lessons he will never forget. When the market rolls over him like a freight train, I hope he has enough sense to resign, although it will be too late for the rest of us.

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