Bear Side

Presenting the Bear Side, lets go to numbers. 

October marked the end of the attempt to test the highs made five years ago in 2007.  Market should decline for 60 months some 800 to 900 points in the S&P and then, if that is not bad enough, test those lows in 2022.  I guess that is another lost decade but at least interest rates will be low.  Refi at 0 with no points and the bank will throw in a vacant home in another state.

Looking back; October 1997 had a low 844 and 2.5 years later market made all time high of 1574 in 2000.  Market then declined to 767 in October of 2002 completing the 5 year cycle.  To speed this up, the market made a high of 1587 in October of 2007 and  made a low of 666 in March of 2009  and then we are right back up at the top of the previous paragraph.

But the Bears believe not just in cycle dirt, but in potential world class screw ups.  Bears believe any multiple combination of hits behind the four doors of the Apocalypse will send equities into a serious down.  Door one; Fiscal cliff.  Door two; Europe.  Door three; Middle East.  And door number four;  Chinese Recession.

 

Downside Hope vs Upside Cash

Markets are rarely obvious.  Apparently either are elections.  Though one might postulate the Wall Street brains may have been convinced Romney would win and sold off the market the days following the election, but that is too obvious.  The probable cause is more of a battle between those who truly believe we have higher prices on hope, and those who are sure the cost of carry is going continue to pay.   After all, in the search for returns,  its not whether one can find value, but where one can play the spread between the cost of money and the speculation on companies for modest returns over zero borrowing costs. 

But there is the fiscal cliff.  Everyone is talking about it so you know its over hyped and part of a self fulfilling temporary flagellation with an eventual hindsight view deserving an even greater upside narrative.    The markets are almost always wrong about the future but always right about the past. 

QRiskValue Over/Under Valued Eight

AAPL   Under
BAC     Under
GOOG  Over
GS        Under
IBM      Under
MSFT   Over
F           Under
PFE      Under

Electorate, Bettors, and Investors

Folks on the Romney side are upset with data coming from Nate Silver and his Fivethirtyeight blog.   Over the last few days Obama has ticked up in his chances to be re-elected according to the models Silver uses to predict the probable outcome.  Now there is now need to fully understand the make up of the methodology used to arrive at these projections but it is interesting how vitriolic the response has been to the blog's conclusions.  Republicans loved Silver when he was predicting their prior victories in various races but have attacked his conclusions of late due to the nature of their conservative bias. 

Silver is not a partisan but merely revealing the probability of Obama defeating Romney using the information he gleans from data mining certain criteria.  He is not telling you what is going to happen but what the models say is most likely to happen.  Vegas does not tell you if the Chicago Bears will win the Superbowl but only the chance of them winning; between 1/10  and 1/12 right now.   Silver says there is roughly an 8 in 10 chance Obama will win the electoral college and a 50/50 chance he will win the popular vote.

Now Vegas is a bit different in the fact that it does not try to predict the winner as much as putting up a line which will encourage the most betting on both sides.   Predicting the path of where the electorate, bettors, and investors with travel are correspondingly determined by votes, bets, and price movement.  Building models on how to capture a probable path is what many of us have successfully done.  But everyday is different and probabilities are not realities.  

Free Market Carny

The last of the political spin cycles will be going on over the next few days as the talking heads move to elect their man.  Business channels such as CNBC are trying to move Romney cheering to a new level as evening hosts  Kudlow and his sidekick, Lisa Something,  try to connect concepts of a fee market America with own ability to reason.  It might be interesting if it were not so pathetically shilled.  But I like watching Kudlow because its like watching a carny trying so sell you a product based on sincere nonsense.   You'd never by the crap but its fun to watch.

So markets have two more months to make everyone happy.  The moves have been anything but exciting and the bulls still dominate.  Fed forced feeding keeps rates down and balloons asset prices while sellers standing in front of the Bernanke equity train are thinning.  Bears know the action requires quick feet and if there are any downside victories ahead they will come out of nowhere.  

Giddy Up

Men sobbing as falling trading volumes for  equities and derivatives are having negative impact on hedge funds, high frequency operations, and exchanges.  But in a world where "up" does not necessarily mean you get a bonus, the performance of the underlying equity prices have had their best year since 2009.   The DJIA sits today just 6% off its all time high while volume for the benchmark average is down around 63% since mid 2009.   Rising equity prices and falling volume have been a feature as a result of a Fed policy directed at supporting financial assets.  It is only fitting that the best place to have been up to this point are the popular indexes which represent an area the general public and many managers has so rejected.

Tops and bottoms are made on huge volume and so the bears may have a particular problem since the S&P500 sits just under 10% off its all time highs.   There is a greater chance to test  those highs given their close proximity and any modest pickup in stock participation would spike values.

But this is an election year and there will be lots of opportunities to screw up the last quarter.   Expect a severe increase in volatility with a Romney victory as Fed leadership uncertainty along with a greater probability of an EU breakdown would create wild swings.  Add in the fiscal cliff impasse mixed in with a giddy Wall Street thinking Mitt means higher.  An Obama win would still have fiscal cliff problems but there would be no Fed issues and the EU would be less likely to implode.

Now imagine on election night in this too close to call election, the glowing lights from the towers of Wall Street as the collective Ivy League intellectual thunder have there hands hovering over the red and green market buttons.  For them, it is all good if Mitt wins although they would just as willing vote for Palin's second cousin if it meant more volatility and a good chance at a bonus. 
  

QRV Over/Under

The QRiskValue Over/Under Valued  Eight

AAPL    Over
BAC      Over
GOOG   Over
GS         Under
IBM       Over
MSFT    Under
F            Under
PFE        Over

Fastdown Or Grind Up

Clean sharp lights shining on an undisturbed baseball diamond is one of the most calming images to behold.   There is no moment in trading ever so calming with the exception of a quiet trading floor hours after the close. Today's markets have no refuge, they just grind endlessly over hills and down valleys.  They are supported by serious explanations of value and derided by suspicious inquisitors.

Bulls have had no lifting problems in 2012, while the bears have repeatedly been trapped by pull backs believed to be so globally dire but only to become rally points.  Certainly the value of the great bailout promise from the EU has risen to new highs.  Nothing has been accomplished but the rewording of tired declarations.

This is a powerful time period for all markets as I so remember back in 1982 with the bottom of commodity markets and the month earlier bottom is equities.  All had be falling for a time and the slow upward march began in the second week of October.  But there is no indication to the direction here under these extraordinary economic times of deliberate intervention and almost constant upside bias.

If this is a top, it will fall rapidly. If it is a pullback, the grind higher will be at the bear's throat before he can cover cleanly.

Fed Picks Theme Song

Ben Bernanke was seen driving away from the Federal Reserve's Open Market Committee Meeting  this week with his head bouncing to Def Leppard's " Pour Some Sugar On Me" which he has personally picked as the Fed's theme song for 2012.  He has also privately predicted the DJIA to hit 20,000 shortly but only if there is world wide economic collapse.  If things get much worse the no telling how high the market can go.  But just in case, Bernanke believes increasing the value of expressionists paintings may be the boost the job market needs. 

Economic Fuel Gauge

Here is the Civilian Employment Population Ratio chart published by the Federal Reserve.
Generational employment as a percentage of the population have been declining since the dot.com bubble in 2000. Then the unprecedented downward momentum caused by the financial crash in 2007 left the chart hanging just over the gains forty years ago.  The chart is sort of an economic fuel gauge which illustrates the dilemma the Fed is in.  Their accommodations cannot seem to find the economic gas tank for the broad middle class and one can sense Bernanke is nervous.  He does not want the current consolidation turning into a ledge for further declines.  "Do something" is now the policy impetus.  Yet all accommodative QE programs have come from what has been called "the double down on trickle down" method.  Feeding the top so they might feed the rest is leaving the chart hanging.