Couple More Market Comments

More market comments.

Posted last week on FinancialSense. (yeah, article is outdated and in the markets, for some, the time issue is so important!) This Week: The Pisani Paradox

• I had the great pleasure of meeting one of my CNBC favorites last week at a conference, Bob Pisani. What I love about Bob is his opinion-free market analysis that is based on facts rather than rants.
  
  What struck me in my conversation with Bob was a paradox that has been bothering me. He indicated that while many of the traders he talked to were bearish, most of them had long positions because that’s the direction the market was going.
  
  I’ve been dealing with this same paradox. I look at all of economic fundamentals and I see a general improvement globally and a lift out of the recession. I look at all the technical indicators and virtually everything is pointing up rather than down. Yet something still bothers me.
  
  I think I may have figured out the Pisani Paradox. The problem is that we are in the midst of a recovery being propelled artificially by a massive and unsustainable fiscal and monetary stimulus. Yet, despite the current upward trajectory, even the best projections show very high employments rates through the end of next year.
  
  Worst still, while GDP growth rates are heading into the positive, few countries other than China and maybe India can look forward to growth rates that are at full potential output for any sustained period. That means a slow growth recovery, which can’t possibly be bullish.
  
  On top of this, many countries – including the U.S. and most of the Eurozone – are dramatically increasing their public debt to GDP ratios; this will create enormous pressures on interest rates down the road and constrain both fiscal and monetary policy.
  
  I add all of this up and come to the conclusion that resolution of the Pisani Paradox likely lies in a range-bound market for several years that only the most nimble of traders will generate robust returns from. The question of course is whether we are now reaching the upper end of that range.
  
  I, for one, have begun to take some significant defensive measures. Never one to be greedy, and after the best six months I”ve ever had in the markets, I have now closed all of my positions in cycle-sensitive stocks save my GE 2011 12.50 leaps. However, for now, I have hedged those leaps with a short on GE stock.
  
  In addition, to hedge my other holdings (primarily biotechs), I have put on my favorite market hedge, TWM. This is the UltraShort Russell2000 ProShares exchange-traded fund, I like using TWM because it has more volatility the instruments one might use to short the Dow or S&P 500. I also like using the UltraShort feature because I can buy fewer shares to achieve my desired hedge.
  
  I have set stop losses on both of my hedges at levels which would indicate a breakout for the market over the resistance levels currently being encountered, e.g., Dow above 10,000.
  
  My bottom line is that the best way to make money in the market is in bursts that leverage the trend. Right now the trend is up but tired and I want to give my capital a well-earned rest and breather from risk. And down the line, we will see if the Pisani Paradox was really a paradox or simply skitterishness on the part of traders who can’t accept a bull market. Either way, I’m hedged for now.

Another great posting from Jesse. So Why Is the Stock Market Going Higher?

• Q: But Jesse, if things are so bad, why is the stock market going up?
  
  A: There is no doubt that equity markets, when judged in nominal terms, can do amazing things when the Fed spikes the punch bowl with grain liquor. Especially when market regulation has been weakened by decades of mistaken ideology and corruption.
  
  The German stock market during the Weimar Crack Up Boom showed some remarkable gains, and was actually a lifesaver for many investors, for a time.
  
  Bull markets are generally corrosive of the average intellect. That is why statists with something to hide love them so much. No matter what era, people willingly surrender their common sense to the bubble, if only for pragmatic reasons.
  
  Those actively playing the deflation trade, short stocks and commodities, are getting killed for now. They are obviously early. The real deflation in paper asset prices will eventually come as the bust follows boom, but more selectively than most imagine, except temporarily if there is a genuine crash and not a long slow decline. Some assets will soar even higher as the dollar devaluation gains momementum and not retrace significantly as the dollar collapses in slow motion.
  
  As Ludwig von Mises noted:
  
  "This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to their altered money relation
  
  There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.
  
  These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy...
  
  But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
  
  It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."
  
  Until then, be aware that the paper chase is on, backed by the full faith and credit, and desperate lies, of some very frightened, but still very powerful and increasingly ruthless, men. There is a good case to be made that the financial sector, led by Wall Street, hijacked the US productive economy and bought off the politicians and has been managing it for their own benefit most notabley since. This is not the first time, and it will most likely not be the last.
  
  Try to stay out of their way as they thrash about, looking for something to fill the hollowness of their being, more fuel for the bonfires of the profane.