The next big trade
February 24, 2009
– Comments (16) |
RELATED TICKERS: SPY
, UWM
, FXP
The traders text book says the next trade is to buy the market down here around S&P 740. I've dipped my toe into a few longs. But I will not be making any big long bets for four reasons:
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FOUR REASONS I CAN NOT GET BULLISH
-not even for a quick trade off the recent lows
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1. I don't like trading - I like investing and there are very few stocks that have good earnings visibility or balance sheet visibility (future interest rates on legacy debt).
2. It is still easy to find stocks that won't work (Sunoco, Toyota, Humana, Netsuite, etc), but very hard to find stocks that will work with reduced global consumption and decreased employment.
3. I do not believe the stock market or the economy can turn until governments of the world address consumer balance sheet issues. The consumer doesn't appear to have enough buying power to stimulate the economy and until the consumer recieves some give aways or benefits from inflation reduced debts I do not believe the economy or stock market can recover.
4. I am leary of the anticipated technical retest of the S&P 500, because EVERYONE is expecting a rally off the november lows (which we almost hit today). I don't like how popular the trade has become and I am worried that the small cap indexes still need to catch up.
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Here is what I did today:
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Instead I've covered most of my shorts and hedged my remaining shorts with some a long biased 2X ETF (UWM) and I'll buy a a high BETA stock (CVI) that might rally 30% -50% with all the other low quality, crappy stocks that always outperform off a market bottom.
I've concentrated my short exposure to the most conservative highest probability short that I have... Toyota Motors (TM). I do not believe that Toyota can recover until there is a solution in place for consumers in the USA and Europe. Saving the banks won't save Toyota... at some point we have to improve the buying power of consumers and so far no soultion is on the horizon.
That's it though- that is as bullish as Dexion10 can get in the middle of a bear market. While I'd like to think that the market is cheap because it is down 50% from it's highs a year ago... the truth is the market doesn't HAVE to stop going down.
BEFORE YOU GET GIDDY AND BUY STOCKS REMEMBER THIS:
In 1930 the market had fallen 60% from it's 1929 highs. From the end of 1930 thru January 1931 the market rallied 30%. It then fell another 66% from 1931 - 1932. The total loss was
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THE BIG ISSUES KNOW ONE IS TALKING ABOUT:
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1. Aggregate consumption is impaired by impaired consumer balance sheets
- implication - consumers will not get easy credit again so aggregate consumption is impaired until consumers debts shrink relative to their earning power. We need wage inflation or asset inflation.
- Further implications: China / Asia can not lead the world out of this mess because there primary end market is the US consumer... so asian strength is a fantasy!
2. Company profit margins are going to revert to historical levels or below historic averages
- implication if you see a company with 10x trailing earnings and their profit margins are falling 50% while their sales are falling 10%. The forward PE is over 20 X earnings (not cheap).
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That is it people!
- I'll turn bullish real quick when I see a solution for the consumer on the horizon.
I believe the winning trade is still to short rallies for severy more months or years. The bottom line is that you can not get bullish on stocks until the consumer balance sheet has improved.
One of the biggest problems for the stock market and the economy is that the middle class consumer and the upper middle class consumer is impaired and so aggregate demand and discretionary income is under huge pressure. Worse - even if we create 20 trillion dollars (exagerated) and give it the banks we still won't have much more loan demand (money creation) or consumption demand.
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