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Monday Morning Quarterback: Risk is a Four-Letter Word


Socioeconomic malaise must be factored into the risk equation.


So, did I miss anything? With some southbound business in the rear-view, I return to my turret to find global markets awash in green. While we paid homage to the breakout and I've been forthright in terms of my positioning, the bovine garden party arrived on cue as soon as I stepped away.

Some things you can almost set your watch by.

There are a few topics for discussion this morning as we fire up for a fresh five-session set. First and foremost are the markets, where the universal view seems to be clear sailing towards S&P 1050, at a minimum, and perhaps S&P 1150, where the downtrend line from the 2007 top comes into play.

To be sure, there are reasons for an optimistic bent. If you were to ask me at the beginning of May what the "best case" scenario for the markets was I would have said a sideways slither that works off the overbought condition as a function of time rather than price.

Further, if the reaction to news is more important than the news itself, Friday's price action on the heels of Microsoft (MSFT) and Amazon (AMZN) offer ample reason to respect the herd mentality. Perception is reality on Wall Street, whether we agree with it or not.

Finally, the breakout above S&P 956 confirmed the reverse head & shoulder patterns on the mainstay indices. While technical analysis is one of our four primary metrics-with fundamentals, psychology and structural influences being the others-confused crowds are often reactive and defer to charts in the absence of clarity. Through that lens, and as past resistance is future support, S&P 956 is a level the bulls will lean against.

These elements, on top of a healthy response to the better-than-expected earnings reports-77% of earnings thus far have beaten expectations-represent the bull case. While bears will share that many of the "beats" were a function of cost cutting, currency gains or inventory builds, price is the ultimate arbiter when it comes to financial markets.

As the saying goes, never let an opinion get in the way of making money.

Why Ask Why?

One of our mainstay Minyan principles is to always ask "Why?" We've done it in good times and bad and it's served us well through the years. The populous opinion is rarely the profitable one and that's been a rinse-and-repeat lesson for investors.

As consensus wraps its arms around our new found reality, there are a few dynamics that must remain on our radar. First and foremost is that when financial Armageddon came knocking, the government effectively bought the cancer and sold the car crash.

While some will argue that people often survive car crashes-and medicine needs to be taken one way or another by this generation or the next-it's a moot point for purposes of the here and now. What's done is done and profitability resides in the ride ahead. I will simply note that it typically takes years before cancer survivors run marathons.

When accountability transferred from the private side to the taxpayer, the specter of societal acrimony, social unrest and geopolitical strife leaped to the forefront of what I perceive to be the most pervasive risk. That's a process until the point of recognition arrives, be it a cumulative comeuppance or a seismic shock of some sort.

While there is no way to quantify the "when," we must remain conscious of the "how" and "why?" When we read about "high frequency orders" benefiting the chosen few or capital preservation lambasted for it's stupidity, we should take a step back and ask ourselves what we've learned through this financial crisis.

Was Morgan Stanley (MS) silly for reducing risk and Goldman Sachs (GS) brave for chasing reward?

Are we that far removed from the panic of the Reserve Primary fund when money market funds broke the buck?

Isn't it clear that what was once a financial crisis morphed into an economic crisis and is now evolving into a social crisis?

These questions aren't a justification or post-rationalization of my view that we're traversing the middle of a "W" formation. I still subscribe to the dreaded double dip thesis but I was wrong in terms of where the widow's peak was.

And Here We Are

Which leads us to the "What now?" question. Consistent with my long-held view, I continue to believe we're in the throws of a prolonged period of socioeconomic malaise that will prove to be entirely more depressing than most folks have factored into their risk assumptions.

The new variable, introduced when the markets legged higher, is one of timing. It would be myopic to assume the market is wrong-the market is never wrong-as I learned the hard way in 2003. The trick to successful trading and investing is capturing the disconnect between perception and reality.

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