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Five Things You Need to Know: Sell Certainty, Buy Doubt... But Not Yet


We need to see a move below the recent intraday low of 839 on the S&P 500 to cause the kind of eye-scratching fear that accompanies significant lows.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

Threads of Hope... Triple Crown Hope & Optimism... No Day for Casual Fans... Hope: Not a Viable Investment Strategy... Eye-Scratching Fear.

Each spring, in certain parts of the country where people care about such things, hope pushes up through newly thawed horse pastures in slim, green threads. In Kentucky, the Thoroughbred Capital of the World, they call these threads Bluegrass. Of course, Bluegrass is not really blue, at least as far as blue goes, it's actually green. The word "Bluegrass" is nothing more than a funny mixture of literary conceit and deception. Not coincidentally, money is green, so is envy; two sides of the same coin, but there it is.

Later in the summer, by the end of June, after the last of the Triple Crown races have run, these threads of hope will have been cut down to size dozens of times by expensive Bush Hogs, soon-to-be-grazed-upon by horse flesh often worth more than a hundred times the price of the expensive machines used to cultivate it. By the end of June the Triple Crown races will be over, and so too the promise of hope, having become little more than a distant memory; not gone forever, but tattered and worn, the newness of its spring appearance replaced by the familiarity of business-as-usual.

Triple Crown Hope & Optimism

The Triple Crown races - the Kentucky Derby, Preakness and Belmont Stakes - are about hope and optimism. Standing in sharp contrast are the Breeders' Cup races that will be run over two days this coming weekend. There is considerably less hope and optimism about Breeders' Cup, that strange weekend in the fall when thoroughbred racing's elite gathers for what is ostensibly the Thoroughbred World Championship. The Breeders' Cup is business. By comparison, the Triple Crown is cute.

Each year on the first Saturday in May, no shortage of unsuspecting rubes will make their way to Louisville for the Kentucky Derby to lose the content of their wallets, and in the infield most of their clothes, to a savage mob of gamblers-turned-bootleggers who have been forced by letter of the local law to smuggle in hundreds of thousands of gallons of liquor to avoid the steep cost of Churchill Downs concessions; $15 for a mint julep, $7 for a cup of warm beer. But it's all in good fun, a wink and a smile, a nudge and a tout, which is why no one ever complains about the fleecing. That and the fact the fleeced innocent only discover the larceny days later, safely back home in Chicago, or Detroit, or the Bronx. "Hey, where are my shoes? Have you seen my wallet? Why do I have Stephen Foster's business card stapled to my underwear?" Good, clean fun.

No Day for Casual Fans

But no casual fan goes to the Breeders' Cup. And this year, with the races being run at Santa Anita racetrack in California, very near the epicenter of the housing bubble's collapse, even fewer are expected to show.

The Kentucky Derby is the next to last race on an 11-race card with nobody much paying attention to what happens save for that two minutes of the day the Derby race is run. Imagine the World Series played in a single inning with lots of batting practice, tobacco spitting, a hot dog-eating contest and beer chugging to fill the dead time and you have an image of any three of the Triple Crown races. But not the Breeders' Cup. The Breeders' Cup on Saturday will consist of nine straight races in less than six hours featuring the fastest, most dangerous horses on the planet. The Triple Crown is glitz and glamour and a lottery ticket to the world of six-figure stud fees. The Breeders' Cup is strictly business. It is a day of reckoning.

Hope: Not a Viable Investment Strategy

In the world of high finance, they say hope is not a viable investment strategy, nor optimism a viable trading plan. Those nuggets of financial wisdom are perfectly crystallized in the path to the Breeders' Cup. The optimists make their foals eligible for the Breeders' Cup just after birth by paying a nominal $500 fee to the Breeders' Cup organization, a bit like a far out of the money call option. Those who are less optimistic wait for some sign of talent to develop. And the longer they wait, the more they will pay as that call option moves closer to being near-the-money.

In 2005, the owners of Starcraft, a New Zealand-bred who was three-year-old champion in Australia, paid $800,000 to enter their horse in the Breeders' Cup Classic race. The purse was worth $4 million. Starcraft finished seventh. Sometimes optimism crosses the threshold of hope and doesn't look back. In this instance, a case of having long ago missed the investment and now over-leveraging the trade.

Of course, as every good trader and investor understands, how you approach hope and optimism determines how you approach your business, no matter whether it's horses or credit spreads. Sell hope, buy fear, they say. Indeed. At the racetrack, sell certainty, buy doubt.

Eye-Scratching Fear

Ye gods, that's a brutally long digression just to avoid having to talk about the stock market. But there's not much fun in financial markets these days, and every time I get five spare minutes to sit down and try and figure out the races being run this weekend some new weird disaster happens to cause stocks to gyrate like a crippled wild boar.

The reality we have to accept is that stocks are being dominated by two forces that the vast majority of traders and investors can't easily see: 1) increasingly wide coprorate bond spreads, and 2) forced selling. I'm a betting man, and my bet is we need to see a move below the recent intraday low of 839 on the S&P 500 to cause the kind of eye-scratching fear that accompanies significant lows. At that point, we can begin to think about fading the consensus opinion that everything is permanently doomed.

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