Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Both Sides of the Track


Since the early days of class wars, folks have aspired to live on the right side of the tracks. For many investors, the coming weeks will define their financial residence.

"Do you ever wonder at what point you got to stop living up here and start living down there?"
--Jimmy "B-Rabbit" Smith, 8 Mile

Since the early days of class wars, folks have aspired to live on the right side of the tracks. For many investors, the coming weeks will define their financial residence.

With the holiday shortened week behind us and earnings directly ahead, the stock market is ready to embark on the next leg of its never-ending journey. The great debate continues to rage, with steadfast bulls on one side and stubborn bears on the other. Both have salient points of view and, as the friction between opinions is where true education lies, it's incumbent on us to see both sides of the upcoming trade.

The bovine are quick to opine that liquidity continues to fuel world markets. With China, Brazil and a host of other emerging markets hitting all-time highs, stateside equities are content to ride those global coat tails. Equity growth stopped being contingent on U.S. growth a long time ago, they'll argue, and as long as the greenback continues to slowly deflate, relative gains should continue to paint dollar denominated P&L's with a green hue.

Further to that, the emerging trend of hedge fund and private equity I.P.O.'s, while dangerous, could introduce another layer of leverage and liquidity to the marketplace. Given the current appetite for risk, it would be myopic to ignore the potential for these funds to tap the public, transfer the risk and build upon the momentum that already exists in that space.

Those are the big picture, secular trends that the bulls are banking on. Couple them with historically low interest rates, increased agita in the sub-prime mortgage complex and housing and banking sectors that have yet to participate in this lift and, well, it's easy to understand why some pundits are so brazenly optimistic. Corrections only serve to strengthen the market if they convert one-time believers to newfound nervous nellies.

On the flip side of the trip, the ursine will argue that the laggage in the financials offers cause for pause. The banks are the most important sector in the equity universe, as they comprise more than 20% of the S&P and serve as an encapsulation of our finance based economy. The BKX (Philadelphia Banking Index) is offering a classic non-confirmation of the broader upside trend, in their view, and will be an obvious signal with the benefit of hindsight.

Shifting their focus to upcoming earnings, the bears will also be watching for the resolution of higher input costs. With upside pressure on things they need, corporate America will either pass them through to an already strapped, debt-laden consumer or risk margin compression. Neither seems particularly positive and, while this isn't a new story, it's a cumulative one. Sooner or later, someone is gonna blink.

All of this is occurring in the context of market DNA that is vastly different than during other economic expansions. Total debt in the U.S. is massive, with more than $3.50 owed for every dollar of GDP. The housing market, much like the bubble before it, is suffering from classic denial despite the heretofore carnage. And foreign holders of U.S. assets are growing increasingly anxious as slippage in the dollar has offset five years of equity gains, planting fertile seeds of nationalization and isolation.

So what to do?

From my perch and with my money, I've positioned myself long individual situations (skewed to the metals) with a healthy dose of S&P puts. While my net exposure is skewed net short, I've taken advantage of the low levels of volatility by positioning my book with positive gamma (long options).

Further, I'm watching several levels for near-term guidance, all of which are right here, right now. They include S&P 1450 (from where we broke), BKX 113.50 (the 200-day moving average for the banks), HGX 118ish (a triple bottom and the 200-day for the homebuilders) and Goldman Sachs $210 (current resistance). Collectively, they'll tell the tale and set the sail.

I think it's fair to say that I expect some downside but respect the upside. If the tape powers through these aforementioned levels, I'll balance a bit, trade around a long option portfolio and remember that discipline must always trump conviction. Indeed, while the next step is a bit murky, I believe increased volatility may be the easiest and most intuitive trade in our midst.

As always, we'll navigate this journey real-time on Minyanville's Buzz and Banter. And if you have yet to see the world's first animated financial television show, I encourage you to take a look. See Hoofy and Boo here!

A wise man once said that a little levity goes a long way. As we chew through these serious times and navigate the current tracks, I would most certainly agree. After all, the light at the end of the tunnel may indeed be an oncoming train.

< Previous
  • 1
Next >
Position in metals, SPX
Featured Videos