Deep Market Thoughts "Fighting Recklessness with Recklessness"

  • Posted by
  • on April 6th, 2009

I have been getting net short the last few days as I slowly leak out of the web stocks I like and add to my Retail short and some SPX Puts.

I don’t have tremendous conviction on the short side, but will lean on a retail setup that looks like this .

I am still patiently waiting some meaningful all-time high breakouts from this massive rally, but most of the move is in the garbagio broken stocks and is just medium term-long-term noise at this point.

I took the title for this post from John Hussman , a really good writer and money manager. The meat:

You can play hot potato with the toxic assets all day long, and only outcome will be that the public will suffer the losses that would otherwise have been properly taken by the banks’ own bondholders. You can tinker with the accounting rules all you want, and it won’t make the banks solvent. It may improve “reported” earnings for a spell, but as investors who care about the stream of future cash flows that will actually be delivered to us over time, it is clear that modifying the accounting rules doesn’t create value. It simply increases the likelihood that financial institutions will quietly go insolvent. I recognize that the accounting changes may reduce the immediate need for regulatory action, since banks will be able to pad their Tier 1 capital with false hope. But we have done nothing to abate foreclosures, and we are just about to begin a huge reset cycle for Alt-A’s and option-ARMs. As the underlying mortgages go into foreclosure, it will ultimately become impossible to argue that the toxic assets would be worth much even in an “orderly transaction.”

More meat:

Interestingly, though there is a lot of chatter in the stock market about the hope for improving economic conditions, it seems that the bond market didn’t get the memo. Credit spreads have moved sideways or have even widened in recent weeks, including corporate-corporate spreads like AAA versus Baa. Many credit default swaps actually blew to new highs last week, though the additional jump the day before the FASB announcement seemed to me to be a speculative pop on the possibility that the FASB would leave mark-to-market alone. In any event, the non-uniform features of the recent advance don’t appear particularly healthy. One gets a stronger signal about investors’ risk preferences when a stock market advance is coupled by broad sector leadership (not just battered junk stocks), narrowing credit spreads, and a wide range of other elements of market action.

If my only choice of making money was to bet on the market, I would be short and getting gynormously shorter for both a trade and a possible new death march. I work too hard elsewhere to have to stress about just that so I will make my smaller bets and keep fighting the good fight in start-up land until an awesome uptrend full of new leading stocks emerges. That is still going to be a while it seems.

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