Tuesday, May 5, 2009

Tea Leaves and Crystal Balls

The market is in the midst of one of the more powerful up thrusts we've seen in many years. It should not be terribly surprising as we are in one of the worst collapses in even more years. What do we see inside the magic 8-ball?

1. Everyone in the investment world and economic world is delving deep into data and anecdotes for positive news. And with the idea that dropping a five pound sledge hammer on one's foot is so much better than an eight pound sledge, we agree. Feels great.

2. The stocks up the most are the stocks that were down the most. These were the most heavily shorted stocks in the world and the covering of short positions can make very powerful rebounds. If Citigroup was shorted near 45 when moving averages began to fall, buying to cover at 2 or 3 or even 4 is still a pretty good trade. With so much political uncertainly, take the money and run seems prudent.

3. Volume has been quite low. There is no indication that institutional money is doing more than edging in.

4. The internal technical issues are frankly strange. In a once in a lifetime decline that is hardly surprising but data going back seventy years is not so readily available as going back twenty. There is a lot of flying blind going on. The Supplementary Liquidity Providers (SLP) program of the New York Stock exchange has the appearance of making Goldman Sachs the spigot for the Fed. When it gets turned off and for how long is unknowable and makes this a follow the money market. The fundamental reasons for the market to rise or fall will be plugged in later.

5. The equity market is not the story here. Its the feel good part right now, but the real market is the credit markets. This is not Adam Smith's invisible hand. This is Timothy Geithner & Co's. dutch boy and the dike gambit. The question is how many fingers does the Fed have?

6. If you are looking back two years or ten you won't think straight. It is a new market. With perfect hindsight, what would you be doing in the 1930's?

As one can see from 1930 to 1940 the S&P Index began dramatically badly but created dramatic opportunity as well. The high of 1929 was not regained until 1946. To look backward and embrace the despair was very easy but not productive for anyone who had investment capital. There are similarities currently I believe.

Investors need to take a deep breath and look forward now. Take a breath, be patient, be prudent, be selective, be strategic, be positive.

As my sons begin their adult lives for the first time outside of the embrace of academia I hope they are not poisoned by the fear that is now so pervasive. They are looking forward and frankly don't care about 1990 or 2000 or 2007. That's ancient history now. The time for fear was two years ago. Now it is the time to make changes and move forward.

John Barnyak