Yesterday’s T-Report: The Mystery Men of Pent up Demand

Posted by on Jan 4, 2013 in The T-Report | No Comments

Who are these mystery men that will drive the market higher?

Yesterday in particular, the bull case seemed to boil down to the view that the fiscal cliff “resolution” would force action from the 3 mystery men

  • The bear who has to cover shorts no matter the cost
  • The bull who is underweight and needs to catch up
  • The person with pent up demand to spend that was waiting for the all clear signal

The problem is, that I find little evidence that this Trinity of the Weak exists. I did not have a single discussion with a bear that was getting run over. I get a sense that most PM’s are pretty long cash and have few hedges. The round of post Christmas weakness had changed that a little, but yesterday’s move more than drove that out. So from the markets view, I found lots of investors betting on the existence of these other two types of participants, and little evidence that they exist.

Which brings us to the real mystery man: “pent up demand” man. Does such a person exist? Are there a great number of consumers who were holding off until the “cliff” was averted? Since most of the consumers barely seemed aware of the cliff, I find that is hard to believe. Just because we have all been thinking about the cliff, doesn’t mean the average consumer has. I am quite prepared to bet, that far more are about to be surprised by lower take home pay rather than about to open their wallet with pent up demand.

But maybe corporations are different? Maybe someone sat there with a great business opportunity but was waiting for the fiscal cliff to proceed. They have something they can sell in big quantities at a great profit but needed the fiscal cliff to be averted first. Once again, I find it hard to picture someone with a great opportunity to hold off just because of the cliff. It is easier to imagine marginal opportunities on hold, but did the cliff really do enough to ease the uncertainty? Some of the cliff was still bad, certainly versus best expectations. Now the uncertainty just shifts to sequestration and debt ceiling.

So that is the question, is anyone really there to buy? If you don’t have pent up demand that you are about to unleash on the world because of the resolution, why assume everyone else does?

I remain small bearish here. Nothing dramatic, but 1,450 doesn’t seem to be the right valuation. The cliff is unlikely to change much in the real world, and just like the post QE announcement in September, the market is far ahead of itself and has already used up months and months of QE money. The economic data and earnings will determine the story from here, but I believe we are more likely to receive data that questions 1,450 as a valuation than reaffirms the risk-on trade, especially if everyone is already long based on expectations that the Trinity of the Weak will have to buy them out.

I don’t like being short CDS here as it is the cheapest, but tough to be long as we all know it goes wider first. I like Europe better than the U.S.




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