Monday, November 10, 2008

Out of the bear camp

Risk has been finally been lowered, I believe. I am out of the bear camp for now. I remain convinced that we are in a bear market but we may be ready for a multi-week rally into Inauguration Day.

I am not 100% convinced though, but the fact the market held the October 10th lows for a month and did not close below S&P 900 last week needs to be respected. I was looking for aftershocks, and last Wed/Thurs were likely it. I covered my shorts for a profit on Friday morning as the market opened up on horrible US jobs data.

I am planning on staying in cash for a little while here until I can see evidence that the bulls have the upper hand and that risk is truly lower. I may change my mind in a minute, especially on a close below 900 or if some big new development (GM?) occurs.

But for the first time in a long time, I’m actually thinking long instead of short. I suspect that a new bull is quite a ways away, and the October 10th lows will be ultimately broken, but probably not in 2008. I would prefer to see a series of up 1% days than the up 10% that usually fail. I will update if I see any further proof that the bottom is in for now or I think that we are going lower.


Jen said...

Hi Adil,

I'm largely still in cash, but I'm finding myself getting mildly less bearish. I'm not certain if I might be deluding myself, however, at least in the short term. Given the magnitude of market drop and the concurrent P/E compression, stocks are certainly looking "cheaper". Unfortunately, in many circumstances, the earnings in most P/E ratios is based on unrealistic expectations of future earnings. When analysts revise their forward earnings estimates lower, my concern is these stocks will not look so cheap after all and the bear market will resume. Given the amount of terrible economic news coming forth, I can't see anything gaining on the horizon. I'm worried that my thinking may be too short-term. In an bear market, don't we typically see commodities rise as they are thought to be a store of value? I'd appreciate your insight.

In other news, it's nice to see that the CREA is getting mildly more realistic and admitting prices aren't going to continue to rise!

Thanks again for your great blog.

Adil Burney said...

Hi Jen

Thank you for your kind words. I agree with your thoughts, with the exception of commodities. Normally, commodities go up and down with the economy, and should thus get killed in the severe recession we are in right now. This time, with a record commodity bubble, I would expect them to get completely crushed (even beyond current levels). It is not unthinkable that oil could go right back down to $40 (or even lower!). I think, but I am not sure on this, that certain commodities would do well in a high inflation recession such as the 1970s (as oil eventually did) but I am no expert on commodities. Follow the charts for some clues and right now, most of the commodity charts look disgusting.

As for CREA, you are right, but they are being absolutely delusional still...see my upcoming post on this

rick said...

I'm surprised at your optimism, but I'm hoping you're right. I've swung the other way. The post October rally didn't sustain itself and I can't see any good news until the new US government takes over.

However, I do think that a massive investment in US infrastructure is coming. It will come if Obama is listening to his advisors. So I think that some traditional industries will see significant rallies.

I agree that commodities are still overvalued. Short term, prices should be closer to 2002 levels or lower. But if Obama follows through with investment in a smart grid (which I have read would cost 2 trillion), certain commodities like copper look good.

I'm interested to hear your thoughts on the US dollar bubble. When will it burst. I'm thinking not until a world economic recovery is at hand, giving investors the confidence to put their money elsewhere.

Adil Burney said...

There is no US dollar bubble in my opinion. The US dollar is the reserve currency of the world and will remain so for a long period of time. The US dollar is only up versus where it was over the past 2years, and is still down substantially over the past 7 years. I am not 100% sure where it is going, but I don’t think a crash is in the works. I think the Euro was in a bubble that is deflating as we speak.

I am not optimistic just less pessimistic short term. Longer term, I am still very pessimistic. I was looking for some more weakness in November and we have got it. Check my recent post for an update.

rick said...

What if oil were priced in euros? Would that not change everything? Putin and Chavez have both publicly announced that they may begin to price oil in euros in the near future.

The US has become dependent on service industries. Their trade deficit is rising. They are selling their childrens' future. This cannot continue indefinitely, and there isn't any indication that it won't.

So the dollar may not collapse soon, but eventually, how could it not?

Adil Burney said...

Eventually, we are all dead...

I agree that the US deficits are horrible but perhaps this crisis will force the US to act to prevent such a default. Believe me, I know what you are saying as it was all this doom & gloom that I was worried about since 2003 & 2004. It tooks years to materialize. In the time it takes for a possible default, the US dollar may rise another 20% for all we know.

Don't believe all this hype about Putin and Chavez pricing oil in Euros. That is all talk from people who don't understand the dynamics. The same people who have been predicting a dollar crash this year. The dollar is up huge except versus the Yen.

Chavez is toast if oil stays at $56 or goes lower (and remember that I called for $60 oil when it was double the current price). He can price it however he wants but the world prices everything (including oil) in dollars. Same goes for Russia's magical economy. Let Iran, Venezuela and Russia price oil in Euros that are depreciating every day!

The US dollar is and will remain the reserve currency of the world for a long long time. If anything gold is going to supplement it and the Yen will be stronger, but the Euro is going lower. I wish I had shorted it as I had hoped to but didn't.

Thanks for your great comments, I really appreciate them!