Sunday, August 9, 2009

How Long Can it Last or How Quickly We Forget

Americans have short memories and even shorter attention spans. That's why in a space of 4 months we've seen comedy shows applauded for lampooning stockpickers replaced with a return to in-your-face/you're an idiot screaming from the MSM if you don't think the economy is roaring again. The disaster of LTCM was swept under by soaring internet stocks. The destruction of internet stocks replaced by a housing bubble. And while the collapse of the housing bubble is ever-lingering, our "newly" found source of hope in the form of infinite government spending has lifted stocks 50% in a very short time.

Chinese markets have rebounded 80% this year, with government pumping up bank Tier-1 ratios in an equally useless effort to increase loans to real economy users this year. Eric Janszen of Itulip has written that this is our second and last chance to short China, as he expects an implosion by their fiscal 4th quarter in both finance and real estate (the WSJ jumped in with a copycat article the day after, but actually recommended a few long picks).

Right on cue, regional banks got an upgrade the day after my last post, with our watch list banks rising between 11% and 26% in the last week. Citi rose over $4 for the first time since our stress test call in April, and is up almost 50% in the last week. So as the S&P crosses 1K and looks for 1050, what's changed since we last saw these levels?

Unemployment is much higher. Continuing benefits on hundreds of thousands of people are set to expire. Another $10 billion in consumer credit was lost last month (quite a bit higher than the $4 billion expected). State and local governments are bankrupt like no other time in our history. CRE is closer to imploding. And we still have all of 2010 and 2011 for ARMS to blow up.

So the race is on to see if the government can fool us into thinking the economy is better until it actually is, or, if as Paul Krugman just suggested, stimulus #2 is inevitable to keep this charade afloat. Until then, we'll keep an eye on the bubbling pot of regional financials, homebuilders, and emerging markets, and relish the opportunity to short them again. I'd be wary of shorting the market through August expiration though, and have even added DIA 97 calls as protection.

1 comment:

Tiger Coach said...

Great Insight...
Business has divided itself into two camps. Those who believe in Obama et al. and those who do not.

Obama is keenly aware that Wall Street's health dictates Main Street's reality... And right now, there are so many lives hinging on the success of Wall Street right now that another significant drop will absolutely lead to a more widespread panic... And that my friend you can take to the bank.

Look at teh stuff I sent you via email and let em know what you think.... Maybe we can stage a come back that eclipses our high water mark!!!