Monday Morning Quarterback: It's All Relative!
Time and price are the arbiters of our financial fate.
"Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted." -Albert Einstein
We often say time and price are the arbiters of our financial fate and 2009 proves this point in spades.
A year that began with investors curled in a fetal position and fund managers wearing "CASH" across their chest like a badge of honor has morphed into a race to the upside and a chase for performance. If hindsight is 20/20, blindly betting into the March crevasse (as some did) and riding the tide higher (as few have) was crystal clear and extremely profitable.
Late Friday, I broke away from my screens and sat with Steve Forbes for a thirty-minute segment that will air later this week. Among the many topics of discussion were the state of the union and the fate of the tape. As I chewed through my view that we're witnessing a cyclical bull nestled within a secular bear, I couldn't help but feel very much in the minority.
Last week, we discussed the litany of pundits, presidents, policymakers, oracles, corporate chieftains and hedge fund honchos who have officially endorsed this rally. The roll call was a "who's who" with a market view, a collection of opinions assuring the public that it's again safe to jump back in the water.
I'm a humble guy, particularly in an industry where humility is viewed as a weakness, and pride myself in adapting-but not conforming-to the fluid landscape of global financial markets. While I'm young in years, I'm confident that history has never before dealt capitalism the hand currently being played by investors around the world.
Six weeks ago today, we asked whether this was Another Bubble or Deep Trouble. In that missive, we quoted the wicked smart strategist Fred Hickey who said, "we may be seeing early signs of the next bubble(s)" while offering "that it will be even more difficult to take short positions against stocks than it was leading up to the market tops in 2000 and 2007 – as hard as that may be to believe."
Fast-forward to this past weekend when James Grant, perhaps one of the greatest market minds of our generation and a gentleman with a reputation for challenging conventional wisdom, penned a high-profile piece in the Wall Street Journal making the case for further upside. "The deeper the slump, the zippier the recovery" he said as he cited the past as a prologue to the future.
As old school Minyans know, I'm a big believer that 'excess breeds excess." In fact, that was our calling cry in these parts as the market climbed higher in the middle innings of this decade. The word "cumulative" was-and continues to be-used often with regard to the consumer, debt, derivatives and the anxiety surrounding steady dollar devaluation.
Albert Einstein famously said, "Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions." As an extension of that, I'll offer that when it comes to financial markets, the populous opinion is rarely the profitable one.
I don't claim to be as smart as many of those aboard the Matador Express and understand that our ultimate destination pales in comparison to the path we take to get there. What I will share, with humility and through the lens of seeing both sides, is that the DNA of the global marketplace is vastly different than what it was when secular bull markets of periods past began to germinate.
FDR didn't know what a derivative was, nor were more than 60% of Americans invested in equities. I would further note that we're coming out of a prolonged period of societal largesse where many lived beyond their means. Excess breeds excess may apply to the depth of despondancy but I would argue it applies to the duration of the attendant hangover as well.
With a conscious nod to credit markets-which are seemingly pointing to an echo bubble, as difficult as that is to believe-I will again offer that risk management must trump reward chasing despite what promises to be an emotional quarter-end (eight trading days) and pervasive performance anxiety into year-end.
We don't "do" advice in the 'Ville as we don't know your time horizon and risk profile. We do, however, pride ourselves on truth and trust and will ask you to remember the following vibes as we edge our way through this historically significant fray:
- Exercise independent thought, as you'll shoulder the responsibility of your decisions regardless of what pundits preach.
- Only risk (trade with) what you can afford to lose.
- Always ask "why" rather than "what?"
- While running with the herd may prove profitable, it often obscures the last exit before the edge of the cliff.
- Size matters in more ways than one; if you're staring at every tick, you're likely out-sized in your positions.
- Expect some options expiration hangover this morning as dealers square their exposure following Friday's put and call funerals. That process typically takes a few hours before a "truer" market read emerges.
- I've been trading from the short side-and I've been wrong-with an eye on defined risk above NDX 1700. While S&P 1120-the downtrend line and a 50% retracement of the entire decline from 2007-looms large, my plan is to reduce some risk and practice discipline over conviction.
- I don't dislike many people but this dude is bad news. I'm all for diplomacy-in fact, that may be our only chance at true globalization-but any lunatic who runs around calling the Holocaust a myth is a red flag for geopolitical stability, particularly if he's got nuclear weapons.
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 firstname.lastname@example.org.
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