Friday, November 13, 2009

Living In Interesting Times; And Why It's Not Paying To Be A Bear Right Now

Just pulling together some thoughts after an interesting week. Do you realize that global central banks and government agencies have thrown upwards of $30 trillion dollars at the crisis through direct lending and indirect backstops, with roughly 65% of that coming from stateside sources?

That's a big number any way you slice it and begs the natural question: is the needle pointing towards hyperinflation?

Not necessarily. If they were creating currency, that would be the most probable path by a long shot and I would be long any physical asset I could get my H1N1-free hands on. But since they're creating credit, it's a whole different analysis regarding how the economy, investors and other countries are likely to respond....

That "fits" with my view that we're sitting at a critical crossroads. The first path is the continued socialization of markets and bearded nationalization of troubled institutions. A lower dollar is a necessary precursor to—but no guarantor of—this dynamic and would continue to punish savers who preserved capital.

The other option is orderly destruction of debt, deflationary pressures and an eventual “outside in” recovery that paves to the way towards true globalization. The result would be a higher dollar and lower asset classes in the intermediate term but a sustainable foundation for economic expansion thereafter.

Deflation in a fractional reserve banking system means policy makers have, for all intents and purposes, lost control of the economy. It would also impact the top tier of our societal structure tied to the marketplace, which would be problematic for politicians and the constituencies that bankroll them. That, as much as anything else, is currently dictating policy......

As for today's market, after a one-day pullback, the buyers were back at work. Volume fell, but, for some reason that escapes me, this market seems to consistently rally on declining volume. Breadth, however, was quite strong and some of the stodgy big caps, like DIS, MSFT and MCD, performed quite well. Some of the big-cap technology stocks, like AAPL, AMZN and GOOG gained nicely, but volume on the moves was quite light. Once again, weakness in the dollar bolstered gold, oil, steel, coal and other commodity-related names, but financials were an obvious weak spot.

Under the surface, there was some choppy action and it looked like we might roll over as the day wound down, but the buyers stepped up in the final hour and pushed us up with some help from a dip in the dollar.

Technically, the major indices, with the exception of the small caps, have been churning for a few days right below key break-out levels. This is a pretty good-looking setup for a move higher. I'm still concerned about some of the weak small-cap action, but overall, the major indices are not an inviting short here.

This market has been much tougher to trade for many market players than the indices would seem to indicate. There is a lot of frustration out there and that is probably one of the reasons we continue to have such a strong market with some unusual technical characteristics.

It is easy to find reasons not to like this market, but a far bigger positive is that the price action is positive. Until the price action actually reflects some concern over the negatives, it won't pay to be bearish.....


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