Why We Remain on the Defensive

While I'm pleased with my recent foray into equities from the long side for the first time in quite a while, I'm heading back rather quickly to 0% equities, a position I've held since the May 2008 high in the SPX at 1,400.

Yes, stocks are down a lot worldwide - but I believe that earnings and earnings estimates will drop even faster, and that P/E ratios will continue to contract until we get to the point of despondency. After this recent relief rally (whether it's over or not ,which remains to be seen), investors have a sense of relief that the bear market must be over - and that we're fully discounting a full-blown recession.

One of the problems I have been rather vocal about is the amount of government intervention/interruptions on a worldwide basis. If the economy and markets were sound, why on earth would we need so much unusual stimulus? Worse yet has been the economy's and market's reaction to the stimuli. If someone had told you that the SEC would occasionally change rules, like eliminating short-selling, or that the Bloomberg “Do Not Short List” would actually fall by 50% after the fact, this would be a sure sign of weakness.

This was the “get Shorty” or “get hedgie” trade that worked for a few days - and then stocks fell by another 50%.


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Nearly $3 trillion have been thrown at the financial system in this country. Brokers have failed; banks have failed or been thrown into forced marriages; brokers have been turned into banks; insurance companies have bought lousy banks just so they can be reclassified as banks themselves. The Fed has become a buyer of commercial paper, nuclear waste CDO's from brokers and banks (Bloomberg LP actually sued the Fed to see what nuclear waste they'd bought; the Fed said no).

We have bailed out AIG (AIG), Fannie (FNM), Freddie (FRE) and Citi (C). The Treasury, through TARP I and II, has now become a huge preferred shareholder of major banks - and “The Chosen” of these (Citi, Bank of America (BAC), JPMorgan (JPM), Merrill Lynch (MER), US Bancorp (USB), Wells Fargo (WFC), Goldman Sachs (GS), Bank of New York (BK) and State Street (STT)) were told to take money they supposedly didn't need.

What if I told you those stocks were also chopped in half after the fact? Wouldn”t you think that the Chosen Ones should rally after being given a new lease on life? Well, they should - but again, they got crushed. The old market axiom of “the reaction to the news is more important than the news itself” held true - and told the Fed and Treasury that “you can run but you can”t hide.”


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