The T Report: Stirred Not Shaken

Posted by on Oct 26, 2012 in The T-Report | No Comments

I Am Confused

No, I’m not confused that the correct phrase is Shaken, Not Stirred, I’m confused by what to do with the market here.

My two big targets have been hit with 1,400 on the S&P 500 now reality and IG19 is extremely close to 100.

Spanish 5 year bond yields are above where they got to after the September 6th unveiling of OMT. That macabre play continues to play out as no one seems willing to recapitalize the bank or engage in aggressive monetary policy, while the economy continues to deteriorate and just announced that unemployment had hit 25%. One in four people is unemployed. Stunning, sad, and scary are the only adjectives that come to mind. Yet for all that, the IBEX is at almost 7,700. That is a far cry from 6,000 which it hit this summer, but well off of 8,100 which it hit in September and again in October.

Then there is Apple. Since late August when I wrote IG at 85 or Apple at 600 the bearish case has needed Apple to do poorly. Strangely enough IG18 is at 89 and Apple is at 610 so what I thought were more extreme cases turned out to be able to coincide with each other. In any case, Apple continues to act as though it is a macro asset class of its own. There are a lot of bulls, but there are many people who have been long and have seen the price decline 10% since they marked the position for the quarter end. That has to leave a mark.

High Yield bonds remain remarkably strong, in spite of slowing retail participation. That is a bit surprising because earnings are starting to show real signs of weakness. At some point the fear of default will come back into play and overall yields don’t support that risk. It will have to be a bit of surprise and not one of the “story” credits that investors already know are at big risk. It will have to be some big, well known, highly leveraged company that comes out with a big miss. Maybe that won’t happen, but with what is going on out there on the overall earnings front, it seems more likely than not.

So where does this leave me?

Stirred Not Shaken

If we were at these levels and had seen a real capitulation to get here, I would be tempted to get long. But we haven’t seen a big shake out. We have generally drifted lower, and each and every day also had periods where the market was positive. This hasn’t been some relentless, overly pessimistic move down. It has been a grind lower that has been fought every step of the way.

Does that mean investors are still too long? To me, the market feels like it has come a long way and the fear should be over, but I don’t know how the longs feel (fortunately). Have they been clinging to their positions or adding, in the expectations of a bounce. Are they ready to give up? I really think there might be that segment of the market that is in that exact position. That would argue for remaining short.

What to do?

I am going to neutral. I would be adding small amounts of risk here and actually tending towards building a long position. I like equities better than fixed income. I like the US about the same as Europe (for the first time).

I am not in a rush to do much here. I would not get very long and would not buy into any bounce. I would use bounces above 1,410 to sell. My view is that the market has become pessimistic enough that the announcement that Spain finally asks for a bailout (which I think will happen now) will provide a spark. Investors will point to the strength of Apple in spite of what seemed like a gruesome warning and a product line-up that seems like variations of the same thing. QE does put money into the market. It doesn’t take much creativity to imagine some of that being put to work.

So I guess I have switched from bear to bull. I’m now officially a selective and non-aggressive somewhat confused bull, but a bull nonetheless. I do wish we had seen a bigger shake-out, but on other hand very few thought we could get to 1,400 again post OMT and QE. I have this feeling I will turn bearish again, probably after we get some news to sell, but for now I think the move down has played out.