{"id":4746,"date":"2011-08-10T16:41:57","date_gmt":"2011-08-10T21:41:57","guid":{"rendered":"http:\/\/leavittbrothers.com\/blog\/?p=4746"},"modified":"2011-08-10T16:41:57","modified_gmt":"2011-08-10T21:41:57","slug":"a-forced-optimisitc-vantage-point","status":"publish","type":"post","link":"https:\/\/blog.leavittbrothers.com\/?p=4746","title":{"rendered":"A Forced, Optimisitc Vantage Point"},"content":{"rendered":"

You guys know my stance. My bias is to the downside. The drop we have had off the highs is not a pullback within an uptrend, it’s the beginning stages of a bear market. Given this I want to try my best to offer a bullish view…or at least a glimmer of hope.<\/span>
\nWe know the 2000-2002 bear market resulted from the tech bubble bursting. Companies that had high overhead and even higher valuations had no revenue, and even companies that could potentially become great (AMZN) were treated with sky-high valuations because expectations were they’d become great immediately instead of over time. The bubble bursting was inevitable, and if memory serves me right, it was Abby Joseph Cohen lowered her equity exposure from 65% to 60% in mid March 2000 that got the ball rolling.<\/span>
\nThe 2007-2009 bear market resulted from a collapse of the financial system. Banks, investment banks, insurance companies and large corporations with huge treasury departments over-leveraged themselves. That works great as long as the music keeps playing, but once the dominoes start to fall, losses mount quickly. Most of the financials had paper losses that exceeded their market caps. Without the banks available to “grease the wheels of capitalism” there was nowhere to go but down.<\/span>
\nThe 2011-20?? bear market resulted from…what? There was no singular crisis that could be pointed to – at least not yet. Yes earnings have worsened, but that’s not enough to cause the intense selling we’ve had. Yes econ numbers started coming in worse, but again, this alone should cause some weakness, but not a free fall. Yes employment numbers have not improved, but they’ve been this bad for two years. Yes housing sucks, but it has sucked for a long time. Yes Standard & Poors lowered their rating on US debt, but the sell-off began two weeks prior to the downgrade. Finally POMO. Yes QE2 ended in June. But the numbers don’t add up if you think the end of QE was what caused the intense selling. The market cap of all publicly traded stocks increased by several trillion dollars. Did buying $600B in treasuries boost the market by several trillion? Doubtful.<\/span>
\nSo what caused the sudden selling? Here’s my guess.<\/span>
\nThe sell-off is due to the lowering of the US’s debt, but word leaked out two weeks prior to its release to enough large players who then sold everything under the sun and then some to position themselves for the official announcement. If you don’t think Goldman Sachs, JP Morgan and the largest hedge funds have friends in high places who feed them information (and get rewarded for the info), well then you keep living in your Mary Poppins world. That’s what I think. So even though there may not appear to be a direct link between the recent selling pressure and the debt downgrade, I think there is. If you disagree, that’s fine. I’m just guessing. I actually don’t know.<\/span>
\nIf this is true – that the selling can be traced back to the downgrade – the next logical question is whether the downgrade is a big deal, is the selling pressure justified. Psychologically it’s a big deal, but does it actually effect things? The US is still going to make their debt payments, and if the lower rating means the US will have to pay higher interest on its bonds, well the market disagrees. Bonds have taken off and rates have continued to drop.<\/span>
\nIf indeed the intense selling pressure was caused by the debt downgrade, and the debt downgrade isn’t a bid deal, then shouldn’t the market recover and continue with business as usual?<\/span>
\nThis is my “optimistic” scenario – that this whole thing is just an overreaction. Earnings have turned down and so have the economic numbers. POMO has ended. It’s the weak time of year (August, September). A pullback made sense – even dropping below the bottom of the 2011 ranges. But a full-blown sell-off that leads to a bear market? Hmmmm. Overreaction?<\/span>
\nThis is my bullish\/optimistic argument which I don’t necessarily believe because in my world, the charts don’t always get it right, but they get it right often enough for me to continue following them. And the charts are COMPLETELY broken. If the market wants to turn up here, fine. I’ll change my bias, but for now, I’m sticking with the downside.<\/span>
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