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Still 50% bullish, 50% bearish.



June 05, 2010 – Comments (11)

portefeuille has recently asked if I'm abandoning my middle-of-the-road position. I am not. I remain (moderately) bullish on America and bearish on all international markets except Britain. There will be a change in this position at some point in the future when the Euro drops to 90 cents. I will then green-thumb foreign markets and become neutral or bearish on America, depending on the S&P market cap. But meanwhile here is the situation that we have now.

The second wave of the crisis is developing exactly as I expected. After the bailout of homeowners worldwide, many governments' balance sheets started to look like that of Enron. The US has printed more and borrowed less as compared to Europe, but it too has accumulated too much debt. By the end of last year, each country's bond market felt like an overcrowded theater that is prone to a fatal stampede for the exit if someone raises the cry of "fire". The only question was which theater would experience that stampede for the exit and which one would stay calm in spite of being overcrowded. In this case, the theaters marked for the accident were European PIGS, the clever competitor was the US government, and the special men hired to cry "fire" in the competing theaters were the ratings agencies.

This winter I spent one hour to drink a cup of coffee and think about the economic prospects of international markets, and came to the conclusion that US market was the only game in town for 2010. Both US and EU were technically insolvent. But it was clear that European bondholders would blink first, because America had the intelligence to create as many as 3 ratings agencies and Europe had the stupidity to create none. It was an easy corollary that these 3 rating agencies would soon start telling bondholders about the danger of European bonds and the safety of US treasures, and Europe would have no tool in its arsenal to fight the negative PR campaign. 

Needless to mention, manipulations can only succeed in those cases when good preconditions are already in place.  If the euro were undervalued vs. the dollar and the debt did not go out of control, Europe would have little to lose in this ratings game. The fundamentals of PPP (purchasing power parity) would create a good line of defense against the onslaught of negative news (negative stories, actually, for that's what they are - stories. These "news" are anything but new). But as it happened, the euro at that time was also overvalued vs. the dollar. It was a bubble waiting to be pricked, and the US had no incentive to keep it growing. So it was an easy bet that all things European would soon come under heavy pressure from panicked sellers.

It was also clear that China, already on its last legs because of its government's failed mercantilist policies, would receive an additional hit from the crisis in Europe, and then Europe, already on its last legs because of its bond crisis, would receive an additional hit from the crash in China, and the ever-present 3 ratings agencies would suddenly "notice" the crisis in China and tell investors to steer clear. And there was nothing to like about Brazil, Russia and the Middle East either because they were in a commodity bubble mode, and that bubble could not survive the implosion of China. And there was nothing to like about Japan either because it was yet another failed merchantilist model, facing its own debt crisis.  

So what would the second wave look like? It was clear that the movie-goers who were lucky enough to escape the overcrowded international theaters would readily flock into the equally overcrowded American theater where the hired man does not raise the cry of "fire". In the global battle of bubbles, the bigger bubble would absorb the air from the smaller bubbles. The conclusion: a horrible global crisis overseas and a booming economy at home. To be more on the accurate side, I don't think flipping houses, stocks, and bonds should be called "economy", but let the linguistic purists fight over such issues. The thing is, we have that misnamed thing known as "US economy" that we invest in, and that thing will be growing in 2010 and beyond while the rest of the world is collapsing.

Insatiable demand for dollars and deflationary impact of cheaper oil and cheaper imports mean that Bernanke will have all the opportunity to reinflate all three domestic bubbles - the housing bubble, the stock bubble, and the bond bubble. S&P 500 will be fairly valued around 1000, and will offer a good buying opportunity if it drops lower. The only issue is that the ride does not have to be smooth. Big players have the habit to shake out weak hands every once in a while (just ask investors who sold at the bottom 15 months ago). So I expect something similar this time as well. They will use this crisis that is objectively good for the US to spin horror stories and justify a sharp selloff. And then money will appear very silently out of nowhere, and buy the dip, and then the media will change its tone and start talking about how this crisis is good for America, and we'll start climbing up along the 4th and the last line of the "W". And the higher we climb, the lower the international markets will drop. 

And then year 2011 will come and go, and the first fantastic bargains will start showing up among the rubble of formerly high-flying foreign markets. Think Russia in 1998 after the default or Indonesia at roughly the same time. Or the oversold oil companies at the time when $8 a barrel was dismissed as yet another temporary bottom. Most of these entities eventually came back with vengeance. This time, some of them go down for good. Many foreign governments will default, and many countries that seemed stable will plunge into a political crisis. But so much more exciting will be the opportunities for the investors who can single out future survivors amid the rubble and will have the patience to miss all the great bargains waiting for the truly incredible ones! The Fool's Global Gains newsletter will be streaming with red ink for the next year, then will spot some future 20-baggers just when subscribers will be throwing the towel.

So, dear Fools, fasten your seatbelts. The new bear market at home will end soon, but the bear market abroad is only beginning.

11 Comments – Post Your Own

#1) On June 05, 2010 at 2:38 PM, BuffetsMentor (20.49) wrote:

Great post. My question to you: how do you play this market? Euro crisis is still tanking our markets. Long american-based companies, short ADR's? Or are ADR's not a good way to short europe?

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#2) On June 05, 2010 at 2:58 PM, starbucks4ever (90.83) wrote:


I play this market by not purchasing any foreign stocks. I never short anything. It's more important to be able to survive being wrong, than to profit from every drop of the market. I like to think of the market as a conscious being that will always bankrupt my portfolio if I give it a slightest chance. 

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#3) On June 05, 2010 at 3:06 PM, BuffetsMentor (20.49) wrote:

Right, but you can have your portfolio bankrupted even if you go long, plus its not like im looking for a one day timing, im pretty sure the trend is down right now

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#4) On June 05, 2010 at 3:13 PM, starbucks4ever (90.83) wrote:

"Right, but you can have your portfolio bankrupted even if you go long"

Only if you are leveraged, or if you put all the eggs into one bankrupt basket. 

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#5) On June 05, 2010 at 3:14 PM, ragedmaximus (< 20) wrote:

your title reminds me of CNBC squak box which over the last few months = 100 % bullshi.......   someone should write a story on them one day hunky dory the next they are showing big bad greece riots and causing fear in the market causing it to get worse in my opinion. I would love to know what trades those pos are up to. i dont even listen to them anymore before 9:30 am when the real party starts.  Whats up with all the bs headlines on yahoo they sure flip flop alot ooohhh 6am market looks to tumble early bs... 8am that post is gone ooh job numbers look good market opening day all job numbers were census workers obama lied market plunges....I wanna start selling a little wall street doll with a noose around his little neck so I can take my frustration out on that kinda like a little wall street vodoo doll!

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#6) On June 05, 2010 at 3:22 PM, VExplorer (29.07) wrote:

Great post. I've had only one point to discuss: CHINA. IMHO: Europe crisis has had comparable impact on economies of both US and China. These economies so interconnected, they only can survive together in short term. I don't see government's "failed mercantilist policies". I hope they just started to implement it. They should, and they can. I've been in China, and I like this business model. It's much smarter to live in US and to do business in China. It will great tandem, like US and UK was after GB Impire failed.

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#7) On June 05, 2010 at 4:57 PM, MoneyWorksforMe (< 20) wrote:

"They will use this crisis that is objectively good for the US to spin horror stories and justify a sharp selloff."

I have a lot of trouble agreeing with this in general.

Where I agree: The fears in Europe will continue to result in a strengthening dollar--at least in the short term-- even as the fed continues to print money and inject stimulus. Foreign money may also find its place in our equity markets as conditions here are relatively better than in their domestic countries.

Where I disagree: Many large cap companies export to the EU. Something like 20% of US exports are to the EU. If these countries go back into recession, profits will undoubtedly drop as demand wanes. Perhaps small and mid cap US companies will be relatively immune, however large caps are likely to be very adversely impacted. I believe the EU suffers from many of the same vulnerabilities the US does, and their disease will eventually spread from them to us, as the financial crisis spread from us to them a few short years ago. The pessimism abroad will undoubtedly lead to a decrease in positive sentiment in the US despite our economic performance. This decrease in optimism threatens our economy with severe deflation as banks tighten lending, consumers close their wallets and business owners are reluctant to hire. The deflation in the short term will ultimately result in stagflation when people finally realize the US cannot legitimately make good on its enormous and growing debt. Treasury yields will skyrocket and the US will have no option but to print its way out. The USD then declines, the same way the Euro currently is...

I have significant trouble in seeing US equities performing well in this macro environment. I think we are in the midst of a double dip, and the second dip will last a few years, although not as severe as the March 09 low. 

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#8) On June 05, 2010 at 11:38 PM, russiangambit (28.82) wrote:

> To be more on the accurate side, I don't think flipping houses, stocks, and bonds should be called "economy", but let the linguistic purists fight over such issues. The thing is, we have that misnamed thing known as "US economy" that we invest in, and that thing will be growing in 2010 and beyond while the rest of the world is collapsing.

Really , I don't see how US could prosper while the rest of the world is collapsing.I don't believe in decoupling for many reasons - economic:  if the rest of the world is deflating US cannot sty afloat;  US needs to seel its stuff somewhere, high dollar is problem, emotional: seeing problems in Europe inevitably leads to contrast and compare questions and US is even worse in many respects.

On a positive side, it looks like China (US's simese twin) so far is determined to support the US fantasy economy. But China's situation is very problematic with the dollar peg. Their goods are getting expensive. FED's money printing leads to overheating in China. AT some point they'll have to save themselves and forget the US. But that point is not now.

On a more philosophical note, I have little hope for a country where people forgot how to tell the truth. You turn on TV or look at official US communications. It is lies upon lies and half-truths. When I watch European TV it is like a breath of fresh air. It is also somewhat censored but US propaganda is on a whole another level. I don't know if it always been this  way in the US. But until the truth is acknowledged there cannot be  fixing of the issues, only pretending that issues don't exist.

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#9) On June 05, 2010 at 11:45 PM, portefeuille (98.80) wrote:

When I watch European TV it is like a breath of fresh air.

Even CNBC is "okay" in Europe ...


I thought I'd bring a voice to you today from "over the pond" - during the many sleepless nights in 2008 as we watched government interventions on Sunday nights and awaited Asia's reactions to our form of corporate socialism, I watched a lot of CNBC Europe. It is like CNBC America except it's actually good. Segments are not broken into 2 minute shoutfests (apparently Europeans have longer attention spans) and the hosts have bright minds, wit, and challenge their guests. This is where I discovered Hugh Hendry, Chief Investment Manager, of Eclectica Asset Management. Quite frankly the difference between the Europe vs US versions are a direct parallel to how US Congress works versus UK Parliament: here, people give 2 minute speeches before voting to 90% empty Congressional hall with no challenges - there, even the Prime Minister stands in a room without prepared remarks, and has to answer critics/questions and think on his feet in an engaging atmosphere of direct confrontation. Ironic really. But I digress.


(from here)

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#10) On June 05, 2010 at 11:48 PM, portefeuille (98.80) wrote:

Some Hendry / CNBC Europe footage is here.

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#11) On June 05, 2010 at 11:50 PM, portefeuille (98.80) wrote:

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