jaudio shorts

FED Up-- The Entrenched Bears Throw in the Towel

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The bears have a tough life.

They cry wolf non-stop through the 5 plus years of a bull market, always warning us of doom and gloom. The "I-told-you-so" moments that the bears celebrate always turn out to be buying opportunities for the smart bulls. A broken clock is right at least twice a day, but bear time never comes. When all is lost, even the most entrenched bear gives up.

Beware when the bear changes course.

While trolling through the boatloads of financial news, I ran across a few interesting articles that would make both bulls and bears do a double take. The first was an article by Brent Arends entitled "Jeremy Grantham's Losing His Growl" featured on thestreet.com. The second was by MSN's Contrarian Chronicles author, Bill Fleckenstein entitled "Tech stocks' pain proves they're vulnerable, too". The third is an article by Jack Willoughby on Barrons.com entitled "Margin Debt-- and Risk--is Growing". These three articles are examples of the dangers ahead of us, and examples of why I am staying on the bear wagon. Lines pulled from each article explain themselves:

1. "They say the time to get really nervous is when the last bear turns bullish."

2. "According to the Investors Intelligence's report . . . last week the bulls stood at 62% and bears at about 19%. For anyone who's been around the stock market for any length of time, that is a clear warning sign."

3. "Based on historical levels, margin debt makes the market look risky and subject to a sharp downtick right now. It comes to 2.4% of total adjusted-market capitalization -- 3.4 times its 62-year norm of 0.74%."

The first two articles work in tandem with each other and the last shows how everything can go south in a hurry. Jeremy Grantham, a long time bear, is "FED up" with the FED seemingly rescuing the market from certain death. Want to know how bearish Grantham has been in the past? Just google his name and read his past work. Converting this guy to a bull is like the Pope renouncing Catholicism. His patience has been tapped out, and the bulls clearly have him on the ropes. The only thing that will keep Grantham from being pummeled would be the FED holding steady on rates and the market shedding 3% in one day.

Fleckenstein has always offered an opposing view to the conventional wisdom, and his latest article doesn't disappoint. His article rips the tech stocks, but it's what's in the last paragraph that is the most interesting. He states that when everyone gets on board to ride the bull, the bull buckles under pressure. We may be reaching that point.

Willoughby's article talks about how we haven't learned from our past mistakes in the not so recent past of August. The historical dollar amount of margin debt isn't as important as the percentage of margin debt to market cap. Nearly all of the margin that was called in after the August meltdown is washing through the market once again. Previous to 2007, we haven't seen it like this since...well...the end of the dot com party. Partying like it is 1999 isn't a bad thing unless we can't make it to the door soon after the ball drops. When margin is called in, the exit door gets incredibly harder to fit through.

I have already admitted in past entries that I called the top of the market early and hence shorted the market early. However, in sticking with my strategy, my trades have been few and I will let the market determine the rest. Vad called me out in his last blog by saying the following:

Jaudio-- you can't really stay all short in the long term- inflation and the fact that your upside is effectively capped at 100% will catch up to you eventually.

It is true and I agree, Vad, that no one can stay all short in the long term, and the upside is capped at 100%. However, this game is short term, so being all short in the short term could pan out. I looked at the overall downward pressure on the bull market coupled with the fact that everyone has bet long. When everyone zigs, I zag. In a market downturn, even the best companies can get hit hard. After all, look at Berkshire Hathaway (BKR.A) at any time during 1999 and compare the stock price then to its low point in the first few months of 2000. It took BKR.A buyers that bought at the top over 4 years to recover their losses. Even the genius gets hit in the short term. My resolve has also been tested in this game . . . enduring the pain as my portfolio gets hit. The game isn't over yet; the fun is just beginning.