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The Real Contrarian Trade


The hope trade, in many ways, is the contrarian trade.

This article comes on the heels of a series of tweets from my Twitter account. A friend (follower) suggested I should expand on it. The meat of my thesis? Let's just call it "The Big Bull Rally."

I think it all started last Thursday with the frustration of reading yet another column by Nouriel Roubini on Mario Draghi and the ECB's plan, and how it was all going to end badly -- very badly. No doubt, in jealousy and frustration with Roubini's fame, I then ironically tweeted: My new plan to get famous: Let me say it now, someday in the future, we will correct and it will feel awful and scary.

But before I go on, let me make something very clear: I understand the bearish trade. Moreover, I understand the ultimate bearish outcome. When I mean I understand it, I mean I understand it deeply, like millions of others. It does not get more bearish than being of Jewish European descent and named Salomon in 1939. It does not get more bearish than being a widower at 35. For many years I lived in communities where people "live" on $1-$5 a day. I guess that's where I get both philosophical and sarcastic: It does not get more bearish than torment, pain, suffering, and death. A bearish trade is a walk in the park compared to a bearish life; it is just money -- and I mean that. So let me pound it some more: The real bearish outcome is death, and it will happen, sooner or later.

There are many shades of bearish from death (war, suffering, famine, disease, pain). But think about it: Some of these are actually bullish compared to the absolutely certain bear trade: death. So philosophically speaking, all scenarios are pretty much bullish until the only bear trade that actually counts. Thus mentally, philosophically, economically -- I understand the big short.

But here and there, I really get sick and annoyed of reading about bears. And this past Saturday, from Twitter, I wanted to write about the almost unspoken black swan of a massive rally, of a bull trade. What if the next black swan is a massive overshot of historical P/E valuations? What if doomsayers are wrong and we actually turn the corner? Not tomorrow, but say over the next couple of years? S&P 500 (^GSPC) at 600 or 2200?

There is a growing group (still confidential, but growing) of bulls calling for S&P 1500 in 2013, maybe even 1700. But there are still just a few commentators calling for something far "crazier," such as a return to the meridian on the S&P historical valuations, and then, as many times in the past, an overshot -- yes, a real, bona fide, exuberant bull rally.

As a pointer on where the crowd is, if you look at SPY calls for January 2014, the $125 puts (roughly putting the S&P at 1250 or lower in January 2014) are worth $8.50 each, and there are 18,227 such open contracts. In contrast, the equivalent $165 calls (so roughly putting the S&P at 1650 or higher) are only $3.09 with 1,518 open contracts. I understand the rationale (2013 is the fiscal cliff year -- sound familiar?) but this metric actually begs the following bottom line: Hope for hope (crash for bears; melt-up rally for bulls); the real hope trade is still very thinly crowded. The hope trade is, in many ways, is the contrarian trade.
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