The Battle of Evermore

By Todd Harrison  JUL 11, 2007 8:42 AM

...despite the litany of potential pitfalls, multi-year highs are within reach, begging the natural question of whether this is a massive disconnect between perception and reality or telling in the context of a stubbornly sticky tape.


"And a new day will dawn for those who stand long and the forests will echo with laughter."
- Led Zeppelin

A wise man once said that there is a difference between having fun and being happy. On Wall Street, the common denominator is one and the same.

With the second quarter in the rear-view, attention quickly shifted from the caveats of mark-to-market to the earnings season opportunities. We narrowly escaped the reality check, conventional wisdom assumed, and secured another three months of subjective assumptions.

Or so the theory goes.

As traders settled into their post-holiday turrets and shook the sand from their shorts, the headlines arrived with furious thunder.

Home Depot, the world's largest home improvement franchise, and Sears Holding, the biggest U.S. department store, quickly reminded investors that consumer driven consumption isn't as rosy as our spending habits would lead us to believe.

At the same time, S&P offered that they may soon cut credit ratings on $12 billion worth of bonds backed by sub-prime mortgages, citing the expectation that losses in the space will likely continue. Moody's piled on last night and downgraded 399 residential mortgage-backed securities, citing "higher than anticipated" rates of delinquency.

The common themes, of course, are credit concerns and the elasticity of debt. The consumer has been the backbone of the underlying bid for years and we've collectively been conditioned to believe that a buyer of last resort would emerge.

Indeed, despite the litany of potential pitfalls, multi-year highs are within reach, begging the natural question of whether this is a massive disconnect between perception and reality or telling in the context of a stubbornly sticky tape.

The bears have became the modern day equivalent of the boy who cried wolf, scurrying for cover each time they've offered caveats or concerns. Price is the ultimate arbiter and recent history hasn't smiled kindly upon them.

In order to understand where we are, however, we must appreciate how we got here.

Fiscal and monetary stimulus caught investors leaning the wrong way on the back to the bubble, into 9/11 and through the Iraq war,

The dollar is off more than 30% the last five years, allowing foreigners to scoop up U.S. equities on the cheap.

Alan Greenspan urged homeowners to opt into adjustable rate mortgages, blowing a big breath into the housing bubble.

And private equity introduced an entirely new, still unforeseen layer of liquidity, a forewind that remains largely untold in terms of longevity.

Regardless of the next market leg, we've got to stop taking gains for granted and appreciate that profiting is a privilege rather than a right.

Chuck Prince, the CEO of Citigroup, said this week that, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

As traders, the ultimate destination isn't as important as the path that we take to get there. As a matter of course, however, we'd be wise to keep our eyes open.

Over the hills and far away.
No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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