Monday, February 7, 2011

Staying Focused

While the equity kids play near the hot stove, don't lose site of the big picture from a macro standpoint.  September 2008 was the start of a painful period for many.  Fortunes were lost in the blink of an eye.  Sunday nights unfortunately involved some CNBC special on learning about CDS, FX lines, Fed Liquidity Programs, etc.  Many vowed they would never use leverage again, they would not get caught in such a frothy market.  They would sell at the first sign of trouble.

This was in the backdrop of the Fed saying that subprime was contained, Kudlow talking about Goldilocks, fund managers saying now was the time to buy.  Now fast forward about 30 months and we find that margin debt is back to pre LEH levels.  Obama in his state of the union says all is well because the stock market is up.  There will be no second leg in housing.  The bond market selling off is not a signal of problems.  I can go on.  Honestly though, I'm tired of watching the kids play, knowing sooner or later their hand is going to get burned again.

I find myself listening to less and less trader chats during the day.  There is just so much noise out there.  A majority truly believe this market will just keep going up and any correction will be minor.

The reality is a vast majority of people in this market are long, have been long, have made a lot of money or recouped a lot of losses, yet they have no appreciation of their surroundings.  For the past twenty three months now, anyone long has been right. Anyone calling into question the validity of asset prices has been wrong, or shall I say early.  The longer this rally goes on, the harder it is to stay focused on the bigger picture. I keep an open mind in my research and am not hung up on a deteriorating macro theme in 2011.  If I find data that contradicts my views, I will change my investing thesis.  Until then, I find the following macro trends to be vary scary indeed:

Sovereign debt:  It's not going away even though the media doesn't talk about it.  The reality is there is an ongoing bank run in Ireland and elections in Ireland that could easily derail the current bailout.  That would then turn the problem to German and French banks along with many other creditors.  Yields in Portugal are at the 7% threshold, Spain is at 5% and no going down.  CDS rates are rising.

Global Unrest:  Egypt may or may not achieve their goal of unseating Mubarak but to think it ends in Egypt I think is a grave misunderstanding.  People have been oppressed for years and now they are being starved through higher food prices.  Yemen is beginning to protest, Saudi Arabia even had a small protest.  I am convinced yet another unintended consequence of QE was a foreign policy nightmare for the US.

Residential and Commercial RE:  Anyone thinking assets prices have bottomed is kidding themselves.  The second leg down has started and more than likely will overcorrect just like equity markets overcorrect, because human emotions are involved.

Jobs:  The data is plain horrid.  People are suffering.  People are trying to provide for a family on part-time income.  People have blown through their savings.  20% of income is in the form of transfer payments from the government.  There is no health here.  Sunny weather in January won't bring back the 160,000 jobs alone each month needed just to match population growth.

Corporate Margins:  They are simply being squeezed by higher input costs.  Any costs that can be passed along will simply cause the consumer to be squeezed.  The economy is slowly being choked to death again in the face of zero real demand by consumers beyond the necessities of life.

I remain largely in cash with a few small hedge credit call spreads on financials.  It is my decision to miss out on any upside and I am fine with that.  


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