In a bull market, the trend is your friend on the upside, so that when good news breaks out, even if it is expected, the asset class goes up. Thus in an established or prospective bull market one looks for a combination of gloomy sentiment but a good chart and some good news for a buy point, and the upside can be great.
In a bear market, the opposite is true. Breakouts tantalize, get to or above key numerical targets or moving averages, but good news has only a transient ability to push the asset class higher, whereas bad news and gloom are no longer contrary indicators suggesting that the smart money should be buying a dip. Rather, the bear market got going for a reason, and bad news is taken as confirming that there is no reason to buy and a rally a good time to "lighten up". Currently that reason not to buy or to lighten up is that very bad things are actually happening in the economy in every part of the world that matters. Somehow it is hard to see that GE will have legitimately good news when it reports earnings tomorrow, no matter whether it "beats expectations" (that horrible, horrible phrase).
In that context, I will assert without detailing that the Bloomberg.com Video Indicator, a proprietary indicator that we use here, has finally shown some net negativity tonight. While it is nice to see this, it is only reflecting reality for a change, and has not gotten overwrought on the downside. So I ignore it tonight and believe it has no predictive value right now.
What may well have predictive value is that every bear I know who manages money was waiting for Inauguration Day or the signing of a stimulus bill (which might have been the same day, it was once said) to sell the November-January rally short. But as pointed out here about 2 weeks ago, the markets peaked once they realized that the economic and financial strategy of the new administration was one of continuity, not dramatic change. Frustrated bears who have not pulled the short-selling and put-buying trigger are waiting for a rally to do so. This makes me nervous about any rally in the short term.
Now we have the headline that Mr. Geithner, incoming Treasury Secretary, opined that China is manipulating its currency. Not that this is a surprising opinion, but many sources indicate that China is being hit very hard economically. How could it not, given that every important export market it has is collapsing? Yet Bloomberg warns that "Geithner Warning on Yuan May Trigger Renewed U.S.-China Economic Tensions". I'm not hyperlinking this article because I'm not going to read it. If you and I know that China manipulates its currency, then for sure China knows it, and therefore that knowledge cannot trigger anything, even a phone call from Beijing to D.C. China will in fact work with its customers to keep its factories going, but there's no easy solution to this problem. Naked Capitalism has been a great source of updates on the China story and is worth checking out daily if China is a special interest of yours.
With Japan's stock market picking up energy on the downside, lwith ots of bears on the U.S. stock market frustrated because they missed this current down-move, with proprietary services such as Lowry's getting very bearish recently after the 2-month rally, and with some bears such as the redoubtable Mr. Fleckenstein having publicly turned bullish, and with almost every economic headline looking scary (and some sugar-coated to look better than they are), it seems to this blog that the conditions are aligning for a further sharp move down to new lows in the market. (I hope NOT and recall that a year ago, when the SocGen news broke, it was reported that Jan. 22/23 is the statistical gloomiest time of the year for people's mood.) Calculated Risk reports real improvement in commercial paper spreads between high- and low-quality issuers, but numerous severe bear markets have existed without this spread being an issue. If stocks were to move to new lows soon on the back of new unexpected bad news (as predicted by Dr. Roubini as being in the cards) and therefore provide an almost unfair test to the nascent Obama Administration, and were to do so without the sort of financial crisis that the collapse of Lehman led to, then I would also predict that the global financial anxiety that has led to the Perth Mint being sold out re its gold production would ebb, and that the price of gold would then find that down is the path of least resistance. In other words, what might be happening is that the financial crisis that began 18 months ago is "in" the markets, but that a more traditional recession bear market is taking over. After all, with former blue chip bank stocks trading at $3 to $5 per share, further declines in them won't affect the averages much.
As Mish keeps pointing out, the reality right now, today and tomorrow, is deflation. There are essentially no bull markets anywhere. I can't remember a time in 30 years in the financial markets when that has been the case. The usual buyers of stocks on declines are in disarray, which explains why rallies have failed for a year-and-a-half straight. Governments hate gold and will not allow it to be money. Gold costs money to store and insure. It can be confiscated. Bond principal and interest can be confiscated as well via default or inflation. The most highly valued stocks in the U.S., such as Procter & Gamble, IBM, AT&T, and GE, either have large negative tangible net worths or trade so far above tangible net worth that they are valued like small rapid-growth companies with very high ROIC. IBM's main business is manufacturing earnings, often supported by treating its employees disgracefully and using every accounting trick in the book. So there is risk everywhere for all major asset classes. (Forget commodities.) Cash in the bank yields little or nothing; perhaps a 2% CD is a great risk-reward investment. One of these days the risks will be to the upside and against the bears. My heart wants to be bullish now. My head says to fuggetaboutit. The ultimate lows of this bear market could be much lower than anyone is talking about, even Nouriel Roubini.
Let's hope that GE tells it like it is tomorrow without playing IBM-like games, and let's hope that what it has to say isn't too bad.
Copyright (C) Long Lake LLC 2009
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