The Not-So-Quiet Riot

My mother used to tell me that the difference between saying something and doing something was all the difference in the world.

We’ve been talking about The Blame Game for years. When the Dow Jones Industrial Average was a kitten’s whisker from all-time highs, we shared sobering thoughts on the emerging trend of societal acrimony, the unintended consequences of moral hazard and the forthcoming "prolonged period of socioeconomic malaise entirely more depressing than a recession."

I remember hearing crickets in the auditorium when I touched on that last point during my keynote at Minyans in the Mountains III. Our community gathered in force for our "Sundance of Finance" and my speech was the last gasp before an afternoon of Minyan Softball and the raucous ranch party thereafter.
 

"Capital preservation, debt reduction, and financial literacy will enhance our odds of prosperity," I said in a steady voice, "That is a life-long process, not a sound bite or a lightning round."

I painted a treacherous picture and there weren’t many smiles in the room.
 

"Tenacity and resolve will be required of us all; view obstacles as opportunities and problems as possibilities -- surround yourself with people you trust that have skill-sets that compliment your own."

Minyanville president Kevin Wassong approached the podium after the speech. As my best friend since the first day of my freshman year at Syracuse, he cut straight to the chase. "Way to suck the air out of the room," he said, only half-jokingly, "People don’t want to hear doom and gloom; they want to be empowered."

I looked him in the eye and countered, "The way to empower them is to prepare them."

Back to the Future

Fast-forward to 2010; our tricky trifecta is in full effect and tension is rising at every turn. And this, I might add, is occurring despite a 65% rally of the lows.

Consistent with our discussion yesterday, Bloomberg is reporting that Goldman Sachs (GS) and Greece didn’t disclose the “currency swap” that allowed the government to hide the extent of its deficit. Goldman brokered ten deals since the 2002 transaction and failed to disclose the swap in at least six of them.

Why does that matter? Two words: truth and trust. I’ve long offered that the next iteration of the crisis will be one of confidence. The European Union now has an excuse to distance itself from Greece, should it so choose. We’ve already seen social mood fray on the periphery -- yesterday’s bombing of JP Morgan (JPM) in Greece serves as an example--and just as the first phase of the crisis arrived in waves, so too will the next manifestation.

Banks have become easy targets, both literally and figuratively. Billionaire Len Blavatnik recently attacked JPMorgan another way -- where it hurts, in its wallet. After losing a tenth of his fortune in risky mortgages--$98 million bananas--he sued the institution after a 15- year relationship, according to Businessweek.

Bombs? Lawsuits? Riots? If social mood and risk appetites shape financial markets, we would be wise to respect the moods and ‘tudes making their way around the world.

In the interest of “seeing both sides,” we offered the bovine bent in yesterday’s opener. To wit, Hoofy is focused on the chart below, which paints the picture of an upside trend channel. Mix in a steady stream of negatives (the proverbial wall of worry), better-than-expected earnings and a fresh set of M&A (Simon Properties (SPG)-General Growth (GGWPQ) yesterday), and you can make the case for an upside chase.

                                            
Click to enlarge

For my part, I’ve been trading around the short side with a tight risk leash, selling blips and covering dips. After lightening my load when the tape traded through S&P 1080 yesterday, I’ve again tethered out some downside exposure with an eye towards layered resistance. S&P 1100-1120 is an important technical context; should we power through, I’ll cut bait and take a fresh look.

R.P.