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Discipline Must Trump Conviction


The short-term rise in the market is surrounded by bad fundamental news.

The fundamental forces that catalyzed my decision to initiate a short position last Tuesday, February 23 (see my Buzz post "Initiating Short Positions"), have not dissipated. To the contrary, almost every data point released since that date related to the US and European economies seems to confirm that a "stall" may be in the works (see Reflexivity and the Stall in the Economic Data).

Today's news that new car registrations in February were down 30% year over year in Germany and that they are down 20% for first two months of 2010 is a source of serious concern. Auto sales were one of the few bright spots in Europe last year, driven by a Cash for Clunkers program. Recent figures for Germany and France are demonstrating that without cash for clunkers, the consumer demand is simply not there. This is a potentially ominous sign for the US.

The European experience raises questions in general about the strength of private demand without the impetus from various fiscal stimulus measures. In Europe, the year-over-year impact of diminished stimulus measures are already a drag on activity statistics. And in the US, please recall that the year-over-year impact of stimulus is set to reverse from currently being a positive factor to being a negative factor in activity statistics by the second half of 2010.

Meanwhile, it was announced today that the number of people registered as jobless in Spain continued to rise in February. The official unemployment rate in Spain rose to an estimated 18.6%, although unofficial estimates are considerably higher. The Spanish official rate is almost double the EU-wide official rate of 9.9%. Youth unemployment (18-24) is at an alarming 44.5%.

In the face of statistics such as this, why have global markets actually risen in the past few days? Unless one considers Chile being devastated by an earthquake registering 8.8 on the Richter scale, I haven't seen much "good" news. Perhaps speculation about a Greek bailout is playing a role

Whatever the cause of the short-term rise in the market in the face of mainly bad fundamental news, a cardinal rule in investing is that discipline in risk management must trump conviction. Thus, I have stopped out of all short positions.

I am now 100% cash.
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No positions in stocks mentioned.
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