S&P Breaks Free of Resistance

Obviously the market is very happy with the government plans and upcoming cuts. This is very similar to reactions back in August when we had the first round in rate cuts, and Bush's first plan to help subprime (which by the way, after causing the street to rally since it would help 'contain' the credit crunch, was never heard of again). Obviously Wall Street is not Main Street and many time, truth be told, knowing too much or thinking too much puts a damper on returns. One can be intellectually correct but lose money. The bottom line is at this point all the issues that dogged the market the past 4 months are now felt to be 'contained' by multiple actions by different arms of the government. While I believe, in time, that will be false, I am not going to argue with a market convinced otherwise. The main word is 'containment' - can these programs contain the issues... I argue no. The market says yes. But the proof will come later so until proof comes, you sit back and let things run upward. As I've stated many times of late, the problem is not really subprime - its a wider credit issue. Subprime is a great term to throw around but its the tip of the proverbial iceberg. Solutions touted in the media address a sliver of the overall problem. Much of the credit in this country is now based on a falling asset. When assets fall, lending contracts. So unless these solutions fix prices on actual homes (locking them where they are), the problems will continue. Or worsen in fact. But hey maybe that's a "solution" that will be proposed by next spring...

As I stated many times, if/when the market (in this case using S&P 500 as proxy) breaks above 1490 I will change my conviction from neutral to 'bullish' (reluctantly). This bullish stance might last 2 days, 2 weeks or 2 months. It all depends on how long the bull wants to run. It might simply be until next Wednesday for all I know.

I think there are many shoes to fall, from state governments, to auto loans, to credit cards, to commercial real estate. I went through and googled job cuts and job losses and am reading of many companies cutting jobs in pretty large numbers >1000, but apparently the reports being fed to the street say otherwise. Whatever the reason, in the near term the market wants to go up, so I'll change with it - for however long this mood lasts. Eventually it will present a great opportunity to latch back on heavy short positions since I believe the pattern we saw the past 3 months will return. Bullishness, followed by reality. I see reality hitting by January at the latest in the next earnings season.

I spent the past few hours cutting back the Ultrashort exposure by about 40%, but it is still sitting in cash. I am going to sit tight for now, although we certainly could put a big rally into the Fed meeting as we normally seem to be doing of late. And then we'll take it from there. When Main Street and Wall Street disassociate either all my presumptions are very wrong, or they will eventually meet again. The bond market is pricing in recession; the equity market is pricing in essentially no problems. We'll see how it plays out; but in the near term the mob always rules, and the mob wants to go up. (see home builders flying today)

I think I do see now the general game plan of the 'invisible hand' - buy time. Get fixed mortgage rates driven to all time lows. They fell this week to below 6%, and the lowest level since 2005. Let people refinance out of their old mortgages into the new. And most problems then disappear by end of 2008. This is the bullish case. I suppose one must be open to it. Unfortunately many who bought in 2004-2007 are now upside down on their homes. That tends to happen when you only need to put $1000 down for a $325,000 mortgage. So I am unclear how they will refinance. But I suppose the 'invisible hand' can come up with a solution to that too - perhaps government can lend each homeowner in America who is upside down on their home $10,000 which they can put down on their home as a down payment for a refi mortgage .... sounds outrageous? If I told you what we are doing now a year ago, you'd say outrageous .... desperation calls for all hands on deck...

If you take a step away, and said to someone in January 2007 these are all the things that will come up in 2007, and ask them where the market would be - I doubt they'd answer "up for the year, and near all time highs". Quite amazing when you think about it.