Thursday, December 11, 2008

Time for a Santa Rally?

As negative as I've been on the markets in the intermediate to long term time frames, I've been more constructive over the short term for the last 3 weeks. While in transit to Germany I took a flyer on UYG, the double long US Financial ETF. Seeing it double over the next few days, I booked the quick profits. Additionally, I've been trying to take my own advice on some of the relative strength plays that I mentioned back in November. The only one of those I managed to take was EBS, but some of the others have performed well also. It should be a further reminder to those looking for bargains the next time the market swoons: Buy what isn't falling, not what is (depending on your time frame, of course.) Here's the performance of those stocks since the morning of Nov 12:

S&P 500: +2%
EBS: +26%
ACM: +67%
INSU: +47%
TSP: -4%
ECH: -12%

Clearly, a basket of relatively outperforming stocks continues to perform better than the broad market on sustained rallies.

I'm expecting this current strength to continue, but am not really confident enough at these levels to be adding more long exposure. Nevertheless, there are a few factors that suggest to me that this rally could continue. First, the plethora of bad news has not been met with further selling (ie, last week's employment number). Usually when that happens, it is a precursor to a stronger rally. Second, the "performance anxiety" factor among institutional fund managers could perpetuate a rush into year-end to make yearly performance numbers not as bad as they otherwise should be. Third, there is still a large amount of optimism toward "our saviour, the messiah," President-Elect Obama and what he will do to "fix" the economy. This is, of course, laughable as we know that economic policy cannot fix the world's derivative mess, debt addiction and consumer excessiveness. Nor can it prevent the cures of bankruptcy and risk-aversion from taking hold. But perception is greater than reality in a world of flashing numbers. I'm always mindful to never underestimate the irrationality of masses, rather to use it to my advantage.

As such, I will be using this rally to lighten up my long exposures. When it feels right, I'll start raising cash and even begin establishing some aggressive short positions. I'm looking at the levels of S&P 500 954 and 1008 as resistance levels. It is my feeling that once this rally exhausts itself, the ensuing leg down will be shocking in it's magnitude.

On another topic:

Some readers have been asking me to address recent comments by some high profile people about a coming "crisis" on Jan 21 or 22. For more information, listen to Colin Powell: "There's going to be a crisis come along on January 21st or 22nd that we don't even know about right now. (About 2:40 in) Or Joe Biden: "Mark my words. It will not be 6 months before the world tests Barack Obama like they tested John Kennedy...Watch, we're gonna have an international crisis, a generated crisis, to test the mettle of this guy...I guarantee you it's going to happen"

Now, when crazy scientists tell me an asteroid is going to crash into earth and kill us all, like they did a few months ago, I tend to disregard it. When some obscure historian tells me the world is about to end because of a Nostradamus text written 3000 years ago, I pay it no mind. But when a former Secretary of State and General, and the Vice-President Elect are both warning of some societal crisis with no details, I tend to wake up at 3 A.M. in a cold sweat.

I must say that I am not encouraged by the sights of the growing unemployed. I just saw footage on German News of last night's simultaneous presence of riot police in Athens, Rome, Madrid and Copenhagen. Our leaders are constantly encouraging the creation of "global financial regulation." This entails the creation of a global governmental organization to which we are expected to yield our sovereignty to. Perhaps that is what British PM Gordon Brown refers to when he mentions the "New World Order" 9 times in 2 mintues. He's not the only one.

But these things are not new. Riots have been happening for centuries. Leaders have attempted power grabs since the beginnings of civilization. It is our collective negative social mood that subliminally makes us more aware of it now. And it is the same subliminal nature of this change in social mood that has encouraged past societies to accept all manners of tyranny to stem it's effects. Hitler, Mao, Lenin, Pol Pot, and countless others have been accepted in times of economic crisis. It is imperative that we learn from our mistakes of the past. We cannot allow our leaders a blank mandate to "fix" our problems. Even the most well-meaning leaders have been corrupted by this power (ie. "absolute power corrupts absolutely.") Whatever acceleration of this crisis awaits us, we must resist any proclimations of, "desperate times call for desperate measures." We've been there. We've done that. And we've seen the destruction that inevitably results from it. Will we learn from history, or will we be just another example of "history repeats itself" in the textbooks our grandchildren will read?

"Societies willing to trade their freedom for temporary security deserve neither and will lose both." - Benjamin Franklin

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