An Artificial Something Or A Real Nothing?

by Dan May 31, 2011 8:50 am • Commentary

Bear with me here as this is a bit of a “think piece”, but I promise there will be some trade ideas later today!  I assume by now that faithful readers of this site don’t return multiple times a day to get fed a lot of garbage about how great the markets or the economy are doing or why this company or that company has the next greatest thing and you should buy the stock……In my own investing/trading I take much more satisfaction in picking holes in stories and by going against the grain a bit. I don’t do this just for the sake of it, I do it because any monkey can throw a dart at a board and likely have the same probability of success on the long side of the market……If it were unprofitable for me to do this, than I would have to rethink this strategy, but I would argue that any investor/trader should have a little of this bias in their generally long portfolio…….If you are looking for a cheerleader for the markets or our economy than this isn’t the place for you…….just turn on the tv or go to prominent market sites, it will be hard to miss all the the optimism.

As I write the S&P futures are up 1%, and European indexes are ripping (DAX up 2%), apparently getting ready to snap 4 consecutive weeks of a generally orderly ~4% peak to trough draw-down in the SPX since making new multi-year highs on May 2nd.    Not sure European Sovereign debt was blamed for the markets malaise, more like slowing growth in China, US and Europe, but it did correspond with a really short rally in the dollar against the euro (now with half of those gains reversed in just a few days) that might have reinforced that notion……I don’t buy it though.

This morning’s headlines that the EU has agreed not to totally restructure Greece’s debt and that there will be a final decision on the package by ECB by the end of June has ignited European markets and our futures…….That’s all fine and good but it all seems a bit artificial to me, much like how our Fed QE’d our markets higher while not solving the real underlying problems of the economy……..this is an unsustainable course of action……The Germans almost had it right for once, let the Greeks suck on their own excess and stupidity and start over from scratch, but of course leveler heads prevailed and thus another bailout.

This brings me to an artificial something or a real nothing……of the hundreds of children’s books that I have read since my first daughter was born almost 8 years ago there is one that stood out to me, The Gift Of Nothing, by Patrick McDonnell, about a cat, Mooch who wants to give the perfect gift to his friend Earl the dog……….Mooch struggles with what to give someone who has everything (in this case a bed, a bowl and a chewy toy).  SPOILER ALERT: After much consideration Mooch decides that the perfect gift for someone who has everything is NOTHING.  So he takes a big box, puts nothing in it and gives it to Earl… first Earl is a little puzzled and then the 2 furry friends hug and just sit beside each other looking out the window together and enjoy “Everything and Nothing” (that was from memory, I might have jumbled it a bit, but you get the drift).

My overwhelming bearishness really starts and stops with my desire to “fight the fed”, everyone and I mean everyone is convinced not that central bankers are right, not in their magnitude or duration of activity, but the fact that what they have been doing for the last 2.5 years has been necessary.  The fact that something so artificial is so necessary just to keep our system afloat, leads me to believe that the sort of reset that the Germans had in mind for Greece is exactly the sort of NOTHING that Central Bankers should consider in the next proposed bailout (coming to a theater near you in Western Europe), or at-least make some hard choices……the fact that the equity markets reward this behavior this late in the game feels like we are near a top… desperate to cling to any “good” news, no matter how artificial.

I am not an all out conspiracy theorist, but the notion that assets need to go up always is kind of a simple collusion…….yes it is in everyone’s best interest when this happens, fed, banks, brokerages, mutual funds, pension funds, individuals etc etc etc…..everyone wants stuff that they own to go higher…..but just because we want that to be, doesn’t mean it has to happen.   The S&P500 made fabulous highs and lows for a 10 year period ending recently and the market was basically in the same place where it started……I am not a believer in buy and hold investing and feel that singular notion could be one of the biggest frauds perpetrated on the American people (oh, except that every American has the right to, and should own a home)…..everyone needs everything to go UP…that’s why 99% of market pundits, fed officials and banks/brokers are always positive.  Since I started in this business I have seen 2 magnificent bubbles emerge and then burst, both causing severe recessions and both prompted by central bankers who were very late to the game in identifying and orchestrating a soft landing….there will be another and soon and it most certainly will play out in a similar fashion…I am not suggesting live and invest in a bunker, just don’t believe everything you hear from central bankers, companies and your broker!  Trade/invest tactically, protect gains and take profits every once in a while…..

With such a strong reaction to the news this AM I wouldn’t try to fade this move immediately, especially when you consider the ability for a mark into month end and inflows for June…….

There is a lot of economic data due out on this side of the pond this week, which could prove to be more important than PIGS….

This morning we have the Case Schiller Home Price Index at 9am which has been trending lower, a bunch of employment stuff leading up to the all important payrolls and unemployment data on Friday morning…..

Technically the SPX held an important level last week, about 1315 which also happened to be the 100 day moving average….potential resistance levels to watch are previous closing highs of 1343 and 1357.  Frankly it looks fairly constructive and with a little more “good” news could be poised to make a new high as we head into the end of the quarter……..

1 YR SPX chart Provided by Bloomberg LP