Sunday, November 15, 2009

Weekend Thoughts from A Professional Trader

You know, after a lot of activity this weekend, I was just getting ready to look at my scans and put a few thoughts down when I read a post from another trader that couldn't possibly sum up any better exactly what is going on in this market and where we may be headed. Here's the link from Upside Trader. Check out the whole article - it is worth it.

Here's a snippet (from Upside Trader's website)....

"First the Bull Case:

1- Low Rates- The Fed has corporate America convinced that they will be borrowing money at zero forever. Their language is vague but excruciatingly clear at the same time, the buzz phrase that they like to use is is “extended period”. The banks are having a bigger and better party than any other sector because they borrow from the FED at zero and loan to the Treasury at higher levels. I’ve heard of borrowing low and lending higher, but that is ridiculous. By the way, it’s great work if you can get it. The reality still seems to be though, they are still not lending, but hoarding, at least that’s what successful business people tell me and friends of mine that have high level banking jobs.

2–Liquidity and the Carry Trade- Mutual fund inflows have been lackluster, money is coming in, but at a drastically reduced rate. Joe Sixpack may have had enough, buying all those fake bottoms may have shattered his faith and his wallet. Some won’t EVER come back. But as I mentioned in a post the other day, who needs mutual fund liquidity when corporate issuance is exploding? That money has to go somewhere.

The carry trade is when institutions borrow relatively cheaply in the short-term financing markets, and then use the proceeds to buy, on a leveraged basis, longer-term and higher-yielding assets. Treasury bonds are the most common asset that banks purchase with the carry trade, but hedge funds will also purchase anything from corporate bonds to emerging market stocks with the proceeds.

This setup usually occurs after a crisis, as the Fed keeps short-term rates lower for a longer period of time than would naturally occur, thus allowing banks to earn back some of their losses by capturing the spread.

The Fed has been unusually clear in stating that conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Despite this clarity investors have not believed the Fed and have been betting on higher yields. These bearish bets have actually hindered the carry trade; but have gotten crushed in the last few weeks as the Fed reinforced their message.

The crushing of those bear bets is likely to open the financing market further, which will likely intensify the carry trade. The carry trade is nothing new to us, but it could pick up steam.

3- The Dollar- This one could go either way, but if the greenback does cave and go lower, and by that I mean a break last months lows, the market should fly and the remaining shorts will be squeezed.

4- Disbelief Factor- No one can understand why we are where we are. The market seems to go higher everyday on lousy volume and bad news. Don’t kid yourself, that could last, again, to reiterate, there are NO sellers. Markets stay over bought and oversold longer than we ever think.


The Bear Case

Earnings- Bears think the current earnings reports were and are a joke. With the exception of some real organic growth numbers, they believe the bar has been lowered to the ground and “beats” are/were due strictly to the slashing of corporate spending and general poverty level spending.

GDP- Bears think it was a jacked up, hacked up number with more smoke and mirrors than a fun house.

Unemployment- We are at 10.2% and going higher, many astute economists say the real rate is closer to 18% when you take in to account the “under employed” and those that have just given up. I classify an M&A analyst at Lehman who now works at the DMV or the Fed as under employed.

The Dollar- Many bears will argue that the dollar is oversold and the short trade in that currency is way crowded. They hope for something, anything to set up a short squeeze in the greenback.

In that sense, every move upwards in US stocks or gold or the Aussie dollar or junk-bond indices is another step in exactly the wrong direction: it’s a step towards yet another massive crash. And it’s all being turbo-charged by Fed policy. If there’s a painless way out of this situation, they don’t see it.

Volume- Let’s face it, it’s anemic. I’ve needed epinephrine blasts just to stay awake the last few months. The bears don’t believe the market should go up or stay up with such light volume.

Interest Rates- The bears argue that when rates do go up, the economy and corporate America will not be able to handle the sugar shock wearing off. When I started in the business in the eighties a very smart guy told me “Son, remember one thing, it’s an interest rate sensitive market and never fight the FED”. I honestly never did forget that and it served me well over the years, but rates were 20% then, Carter was getting kicked to the curb and there was room to lower rates then. It’s hard to get excited by rates going to…..an 1/8th????????"


I've made some attempts this week in my posts to explain what is going on in this market and why (perhaps) it has been so difficult to trade from a rational and historical perspective. I don't know if it will remain that way, but I have a feeling it will and that very few people are going to play it perfectly from here to the rest of the year. I am short right now but will get out if we break to new highs without hesitation. The bearish signs remain out there, but they've been out there for a while now, and it hasn't mattered. Who knows when it will matter? I am off to watch Curb Your Enthusiasm - good luck next week. .

1 comment:

Lee said...

Thanks for the link Mac and your posts as well. Read them nightly, and I will read his for awhile to see if he's a keeper.

TA wise, lot's of ugly charts and seems the retailer will eat this one in the end if he is still buying IMO....