Short Term Bullish?

I realize sometimes reading this blog can be a downer - but frankly I believe truth and reality helps people make money more than "blind optimism" - that "cheery stuff" can be found on most financial websites or financial business TV shows. I do wish at times I can make this a more cheery place (and hope someday we can when conditions in the US change), but for most of the time since the blog started last August it has been more important to preserve capital and be defensive. But I will toss out a short term bullish bias ("Be Happy") that I am forming at this point. With 1 caveat - no surprising blind side line item from a financial company....

This is within the context of a larger bear market but... for the first time in a long time I am reading almost everywhere the ideas I have been posing for a long time. And once a view that was once scoffed at becomes conventional theory I believe it begins getting priced into the market. Again, something like the Bear Stearns debacle obviously was not priced into the market as it happened nearly overnight, but the "risks to the financial system" are now being talked about openly on TV shows, and many financial websites - whereas in the past it was Roubini, Schiff, Minyanville.com, Mish Shedlock, and that's about it. Now it's everywhere. So it is slowly but surely getting in.

Next, our leadership finally seems to get how bad it is. This Sunday's actions to extend the discount window to the investment banks AND the perceived backstop the Federal Reserve now has put on all financial assets is important. It doesn't mean they can hold off the negative deluge forever, but they are going to do their best to keep kicking the can down the road until things improve. This is what we do in America.

Another point I have been promoting for a long time is eventually the federal government will get involved in directly buying mortgages - as the financial situation devolves, and in the heart of a presidential political campaign the pressure will be immense. I believe all the free market Republicans will eventually cave to self preservation and this step will happen.... and from recent actions my "theory" from last summer is gaining more evidence by the day. At some point the market will begin pricing that in as well. Do I like it? No. Is it fair? No. But my job is not to like it or find fairness - just make money. So I am a realist if nothing else. In this culture of "it's not my fault" and "come bail me out from my mistakes" I just think this is the eventual end game. The financial leverage is just too great in the system - and as more people begin to "walk away" in 2008, more loans will become non performing.

There are myriad other reasons but they all fall under the same pattern. Denial is finally turning into acceptance. Especially at the Federal Reserve. Inflation is not a concern with these people, so money will be printed to save the financial system at all costs. And the actions since last Tuesday show how serious they now are.

Now this does not mean I expect a massive rally, nor that the underlying economic pinning is strong. But it doesn't have to be, for some meaningful rallies. In fact most of the greatest rallies in history have come within the context of a bear market. I do expect quarters, if not years of middling US growth and real inflation (that the government disavows is happening). But that does not mean the stock market cannot have periods of solid returns.

Negativity is extremely high - every other blogger now sounds like me. ;) That's contrarion. And yesterday's technical price action literally broke every rule I know. So it tells me (as Todd Harrison of Minyanville.com likes to say), nothing is more dangerous than a cornered animal. And the folks in the government are cornered - and powerful. So the concept of free markets gets thrown out at those times, and rules that work for decades suddenly become moot. Yesterday showed that to me. So for now, until the next wave of reality hits... I'll be constructive. I'd be more constructive if "they" allowed us to swoosh down and have some serious pain, and create some great buying opportunities. But it is what it is. How far or high it takes us I don't know. If the financials/retailers/homebuilders will be the "leadership" for the short run (as they were in mid January) I don't know. But I do know a lot of action we will never see or know about seems to be afoot behind the scenes. And being on the opposite side of that trade can be detrimental. Kicking the can is a national policy, so one must respect that. Unfortunately our children and grandchildren will suffer. But that's not important in terms of how the market will do in the next few weeks/months/years.

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