STATICRHETORIC

by C.S. Jefferson

Market Memory:  An Abbreviated Tale Of Two Bottoms

As we sit at consolidation levels around 1,000 on the S&P 500, we are witnessing the critical nexus point of a binary event waiting to happen…

It seems that every single trading session bares witness to commentators and analysts on the financial news infomercials promulgating this idea of retesting the market bottom in order to validate the run to the upside.  Perhaps, it highlights the conversation as a major benchmark and level of theoretical risk to the downside.  Market memory, anniversaries and the unknown will always cause varying degrees of consternation that provokes one to question reflections seen in the rearview mirror.  However, there are so many traders that have missed capturing the upside and full potential move off the lows that a viral contagion of sour grapes has spread in hopes that the market will sell off, simply to allow a safe entry point or second chance “once in a lifetime opportunity” for all those that missed the move to begin with.

This, in of itself, is very disingenuous and suspect analysis by many reasoned professionals that have motive to draw this market down again either by being unbearably short against the rising momentum, or by having itchy trigger fingers waiting for opportunities to buy.  I’m not entirely convinced they’ll get an easy entry point anytime soon, which actually can cause this market to push much higher long before there is complete confirmation of a sustainable economic recovery.  In fact, if you ever wanted a catalyst to push these markets even higher, it would be that fund managers are underinvested and being forced to chase performance to close out the year.  Six months ago fund managers could get away with adopting the mantra “less worse” while losing money by a smaller percentage than the drop in the S&P 500, or being on the sidelines with cash; but now with the last quarter of the year approaching, those that missed the move and have underperformed are feeling the squeeze to demonstrate positive returns, otherwise, face the certainty of redemptions and withdrawals.   

But being a contrarian does not mean you can afford to stand against the tide when the market does shift dramatically and finally sell off into a major correction.  Not if, but when we sell off and, without question, there are legitimate reasons to doubt this market going forward,  for fear of the unknown is only part of the major headwinds that we face.  The real albatross hanging over this market is continuing job losses and deteriorating consumer spending that has the potential encumbrance to stall out any positive momentum.  Tax selling may be another real driver toward the end of the year with the guaranteed prospect of  capital gains rates expiring.  Probably, more concrete, is the changing sentiment when macro-economic numbers can no longer sustain the unrealistic expectations and traders begin to pay attention to a struggling recovery.  I, personally, don’t see how job growth–let alone job replacement–can even occur anytime soon, and playing these monthly unemployment lottery numbers as the economic bellwether sets the market up for a serious move up or down.  

What is impaired may be forever damaged, and what has changed may have forever changed us all.  I hope I’m wrong on this issue, but in a global financial system the changing dynamics in our competitive landscape makes those that yearn to turn back the clock to yesteryear incapable of direct participation, who will only find themselves as relics in the context of history.   Yes, the overall economic data is showing signs of improvement off the bottom, but where is the sustainable growth coming from?  People still refuse to accept that we are in a credit contraction worsened by deflationary pressures  and that the old rules of borrowing equity off leveraged assets in home values has all but disappeared from the market.   The operational mechanics that provided this supplemental household wealth has simply evaporated into someone else’s pockets–let alone thin air–as this global paper asset Ponzi scheme unraveled and seems less likely to return wholesale anytime soon. 

Of course, earnings power by companies left standing will handily beat lowered expectations even with margin compressions due to a greater percentage of overall market share, or aggressive shredding off liabilities through labor cuts and less competition which will make best-of-breed stocks very good investments based on survival, not necessarily growth.  It seems very likely we will see this divergent pattern to the overall economic conditions for some time to come.  However, these are merely my  assumptions based on events that are yet to fully transpire with definitive results and, regardless, as a trader you must be willing to maintain risk protection while navigating a course through uncharted territory.  

So when we continue to hear hyperbolic references to the absolute market bottom on the financial news, and as reported in most financial journals, keep it in mind to ask which bottom are they referring to?  Look, I’m still shocked the market fell as low as it did back in March, breaking the October and November lows of last year which I believed and still maintain were the true bottom. However, to be clear, it was a very misleading decline that took the S&P in the 660 range back in early March of this year compared to what occurred during the calamity of last year when no one could guarantee an absolute end to the madness.   For me, personally, the market truly bottomed last fall throughout the crisis in October and November of 2008, even as the overall indices were trading much lower several months later in March 2009.   Look at the performance of some of the individual companies as validation when it was estimated nearly 40% of the underlying stocks within the S&P 500 were higher in March of 2009, despite the overall index itself being lower–mainly due to weak counterparts in the financial arena.   This was a critical inflection point that demonstrated strength and real buying support in specific sectors without regard to the same financial media crying about another meltdown and scaring people out of the market.  It’s important to understand that while the S&P 500 is highly regarded as the overall market barometer, or the benchmark to measure a fund manager’s performance, this market rally has proven to be much more specific to individual stocks, sectors and themes.  

I’ve been very bullish on the stock market since the collapse last year because, to me, that was the “once in a lifetime buying opportunity.”  But such opportunities occur more frequently than we’d anticipate, and I do feel much more trepidation as cheerleaders in the media start waving their pom-poms by calling the end of the recession.  Of course, history tends to repeat itself and there are always moments of opportunity which all depends on which stocks you’re  buying.    Which is why I say, contrary to how the financial news seems to characterize their version of the market bottom, there were really two different market bottoms depending on which stocks you were playing.  From a technical point of view, it would be more accurate to state those March lows were the proverbial “retest”–make no mistake about it that was a market crash in 2008–that many myopic professionals have been looking for and missed by shorting, or staying on the sidelines since then as the market rallied higher!

I think too many people in the media were continually miscalculating the strength in the market as it afforded tremendous opportunities throughout the crisis.  By relying on the major indices as a whole, it became a matter of convenience to tell the story through the generalized market averages as front page news or breaking headlines, and by exploiting this defect the financial media was neglecting overriding facts that sector specific performance within the S&P, DJIA and Nasdaq told a completely different tale than the numbers printed across the tape on the big board.  The weaker speculative plays and injury prone, financially maimed stocks were definitely capped with constricted p/e multiples, but real earnings power plus revenue growth was always in play no matter how catastrophic it seemed. Money has been put to work since the debacle began by initiating a buying spree on companies trading at historic discount prices.

The rise since pushing the S&P 500 back up across 1,000 and daring to break higher on the upside has been dramatic, but it cautions people to believe we have achieved too much too fast, such that we’re due for a serious meltdown or pullback in the markets.  I assume there are a lot of professionals that are trying to be too cute in timing the markets and have completely missed the majority of the move to the upside.  Their bearish sentiment and pessimism strikes as covertly insincere, but you cannot ignore their presence or manifesting ability to eventuate desired outcomes.  If you can listen beyond the white noise, many fund managers admit at certain price levels they would be licking their chops as buyers of the market which implies they are currently underinvested and are begging for a retest, just so they can have a second chance opportunity.  I hope they never get that chance because it would only mean an outcome of more chaos and panic after working so hard to stabilize the global financial  markets.  And since the political rhetoric has reached a deafening crescendo of bailout fatigue, it would be difficult to orchestrate another wave of wide scale monetary injections to boost the economy and prop the markets with cartoon, superhero-like “plunge protection ninja teams” in the cover of darkness.  This means that any potential retest of the March lows would only result in further deterioration of the economy and disastrous results in the market that could send the S&P 500 well below 600–forget the notion of a retest, it would be financial Armageddon.  Let’s hope this is not the outcome because it would mean that all the stimulus and monetary easing has failed such that even the bearish argument is inadequate in recognizing the severity of what may come. 

Can we have another major sell off that exceeds everything we’ve seen so far?  Absolutely.  I don’t deny it and have had many sleepless nights about playing Bear market limbo:  How low can you go?  There are plenty of soothsayers calling for markets to revisit the March lows  hoping to make a name for themselves by saying, “I told you so.”  I think the percentages are far less in favor of anything close to a significant market retest of the lows, but still the possibility exists and we have yet to fully recover with respect to the “real economy,” despite some very effective consolidation in the market.  I suppose what I’m really suggesting is that these so-called “market bottoms” are headline worthy news items, but don’t necessarily convey individual stories of stocks and serve as distractions more than anything else.  We could pull back dramatically in the S&P 500 while certain stocks would hold up better than most others which suggests, quite confidently, there is money that can be put to work with the correct asset allocation.  And as a long-term investor, there isn’t any time that I am not invested in the market.  I don’t run to cash by liquidating everything as the market sells off, nor do I feel complacent or compelled to chase when things rise.  The difference is that in order to manage a portfolio, I must maintain hedging strategies that allow me to stay invested in the market no matter where it trades. 

But as stated before, calling the exact bottom of any market is a fool’s game because it is not a singular reflexive pivot point–the bottom of the market is a process that is formulated over time.  Looking through the rearview mirror is easy to mark a moment in history, or graph it on a chart, but the struggle to endure and stay in the game so that you can actually exploit opportunity is the true measure of calling a bottom that can only come by realized returns in your portfolio; otherwise it’s all just conjecture and academic conversation.

 Author’s disclosure:  Long BHP, FCX, AAUKY, AA, ACH, X, V, NYX, NDAQ, DOW, DD, LMT, BA.

by C.S. Jefferson

When political commentators refer to an “October surprise” as the unquantifiable risk in gaming the election cycle, few could have predicted what the exact nature of the surprise would have been, even fewer could have anticipated the sustained pressure in the markets and underlying severity of the economy would ultimately be the reason to throw the election decisively in Barack Obama’s favor.

The effects were so dramatic that both candidates running for office were essentially, relegated and reassigned to the spectator seats as a political sideshow. In a time of unprecedented volatility and crisis in our economy, both candidates failed miserably to provide necessary leadership when the 3a.m. call rang. Surprisingly and to their credit, the bi-partisan Congress did more in response by finally showing they can work together outside of party ideology. Unfortunately, it took a situation directly effecting their own pocketbooks and not just their constituent’s concerns to forcibly mandate policy into action.

The true nexus of power that shapes our future as a nation was determined more by the policy makers in our banking and financial system, such as Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. It was an amazing display to witness the absolute impotence of the two party candidates unable to grasp the situation at hand, or even to orchestrate a legitimate policy and solution to avert imminent disaster.

The economy has been struggling for years if you ask the average middle class working person, it just mattered what part of the economy you were living in to accurately determine the definition of a recession. However, market volatility and the risk of complete credit default and asset deterioration made even staunch Republicans consider voting for Obama in the end.

I don’t know about “Joe six pack,” but I’m willing to bet there are more average “Joe six-kegs” with beer guts that are willing to break from traditional voting patterns. I’m half-surprised there hasn’t been larger coverage on the movement of “rednecks for Obama.”

It’s nice to belong to and have a party affiliation of your choice, but if there is no underlying economy to support such ideology and rhetoric, red and blue states become meaningless, color blind demarcation lines on a geographical map.

While it is increasingly unlikely that McCain can pull off the upset, nothing is final until the last vote is counted, misprinted, deleted or tossed out with a hanging chad. I care less if one particular candidate wins or not over the other; I care more that the election is legitimate, transparent, verifiable, and capable of being fully audited to reflect the will of the people.

And if the unthinkable upset did occur then Intrade, the legal betting venue on the elections, will probably pay out better than the ponies or this week’s football over and under spreads.

However, only one of the two candidates is running under the banner of the incumbent party and, therefore, the cost is severe in the mindset of most Americans as we seek to point the finger and blame those responsible for bad stewardship at the helm of our economy. By making career politicians pay with removal from office, maybe those that profess to serve the will of the people eventually get the message that origination of ideas by the founding fathers who believed in checks and balances didn’t, literally, mean legislating only for special interests or balancing their own own checkbooks by voting for pay raises and pork belly spending. Any career politician that receives taxpayer based salary is a bailout in my mind, and should be voluntarily serving the public trust without monetary compensation, let alone health care provisions that are denied to a growing population of Americans.

The mainstream media will record this election as historical in the context of both racial and gender barriers that were smashed and broken. And all of this is nice on a very superficial level, but fails to represent the true demographics of our nation that remain divided by the real chasm of class and privilege. Racial division has long been the misguided excuse for the disparity between prosperity and poverty.

Has political correctness simply gone too far during this election cycle? I hope that more qualified representatives of our democracy continue to step forward from all corners of our tribal heritage, not because they simply fulfill the role of being the first representative of a particular gender or culture, but because their political will and convictions serve the constituents of our nation as a whole.

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