Crystal ball gets cloudy; current thoughts
The market continues to misbehave in several segments at once, and I see clearly that keeping the all-star charm during the next several months will be very difficult and in fact, unlikely. First, there is this emerging-markets rally detached from all fundamentals and looking like a replica of 2007. I am short China in Caps, and red ink will only be getting worse until the rally runs out of breath. Then there is oil rally running on hopes for more demand from China and the last stage of the gold bubble that could see prices double, and finally, there is disappointing performance by the banks. Only the blue chips are behaving correctly.
It seems to me that we are going to have a pullback, at least to 1120-1130, based on the Robosignergate scandal. The banks will continue to drop at least until the scale of the problem becomes clear. If it turns out that these morons have lost the paperwork for, let's say, 10% of mortgaged houses, then we may again have a banking crisis for a few weeks while the government decides how to change accounting rules and whether to start TARP 2.0. By the way, it will be ironic if the banking CEOs will now ask the government to un-return the TARP funds, having just fleeced shareholders to unlock bonuses by returning these TARP funds ahead of schedule.
In some extreme scenarios (10% probability or so), I even think those of us who missed the opportunity to pick WFC at $8 may get a second chance.
More likely, I think the missing documentation will affect something like 1% of mortgages, not enough to derail the long-term rise of banks. But the real wildcard is the lawsuits, and it's a certainty that the lawyers come very soon to extract their pound of flesh. For the next few years, headlines like "80-year-old woman sues Bank of America for $10 Billion after the bank illegally seized her house" will be putting brakes on bank stocks. After the dust settles, I think the banks will escape with modest losses on the order of $40-50 Billion.
At the risk of sounding trivial, I will say that boring stocks like KO will be the best bet for the next month.
Meanwhile, if this crazy story can succeed in creating a Liquidity Crisis Lite, then speculative Chinese stocks will be the first to crash so at least some of my red thumbs will finally be vindicated.