Morning Audibles 3.29.10 - It's Spring, But Keep the Earmuffs Handy

This past weekend I did hardly anything market or blog related. I stayed almost completely away from economic and financial news and instead worked around the yard most of the weekend getting areas cleaned out and ready for spring planting.


Naturally, come late Sunday, early Monday, I have to post a thread for this blog so I did a quick perusal of some of the usual haunts (Bloomberg, ZH, etc.) to see if there were any 'headline' happenings that might affect the markets this week. Before I get into that, I should start with a summary of the ideas I had in my head after the close of Friday. Sort of a "what worries me, what doesn't worry me" checklist. I'll list some of those here.


WHAT DOESN'T WORRY ME
- I believe that fundamentally equities are in bubble territory and will eventually correct.
- I apply that logic to both short and long term (medium term I'm still debating). To quantify that, perhaps a 5-10% correction in the short term, and eventually possibly a 50% correction (or more) longer term
- I'm not overly concerned with my own economic status, however, I'd prefer not to lose money trying to 'short' equities while the markets ar behaving irrational.


WHAT DOES WORRY ME
- Markets have shown that they can stay irrational for a long time.
- I'm worried that now that we seem to be in the latter phases of "bubble mentality", that NEWS FLOW tends to be the "justification of choice" to keep a bid under the market. Emotionally, it's very difficult to hold a position against that.
- I'm worried that, going into this week, the DIAL of that news flow is going to be turned to HIGH VOLUME.

If that's the case, and you're a bear, it might be best to put the ear muffs on for awhile.


Here are some examples of how the MSM and stock touters are going to operate this week.


1. End of quarter - NEED to "window dress" (we still have 3 more days to endure).
2. Proximity of S&P index to 1,200. (It's sure to get there, right?).
3. Manic Mondays - Market always "melts-up" on Mondays, right. Futures are already green.
4. Friday's jobs report will show employment gains (census jobs - but who cares about details)?
5. Earnings season coming
6. Economic Confidence numbers in Europe improving
7. Greece bailed out.
8. Dollar strong (now WAIT, this 'should' be a negative right? This week they'll spin it POSITIVE and say that since Treasuries are weak, and with a falling Euro, the only asset class to buy will be US equities - YOU WATCH).
9. Then, you get stuff like this that I read over at ZH

I can tell you THAT was met with much "consternation". The article seemed to give the impression that a "melt up" was imminent. Frankly, I don't think it implies anything in particular (comparing to the similar two spikes to now and last March when the markets started on this P2 run). I'll give you some reasons:

- Both came at the end of March. Japans fiscal year end. This may have had more to do with carry trade unwinding and squaring than anything else. Same with last year. This happens EVERY March.

- Look at the EOQ months on the chart. All EOQ months show spikes (rebalancing). For that matter, the smaller spike that preceded January '10 was followed by a 'correction in equities' (and in fact, the trough afterwards was perhaps just an insurance policy to get through the quarter).

- The large cover SPY positions may have even been the Fed, who was instructed to keep a put under the market until the HC bill was passed. In fact, last week there were several attempts to take the market down, which all failed.

The bottom line is, if you have EARMUFFS on, you don't have to really see anything sinister in the markets. I could be wrong here, but that's my position.

Two things I think we do have to watch very closely are long bond prices, and the EUR/USD. Last week, Goldman did a 180. (Going from a BUY recommendation on the Eur with a STOP LOSS at 1.34, to a SELL rating on it with a STOP at 1.35). This morning, 1.35 is likely to be tested. It would be AMAZING to see GS get stopped out TWICE on a public call they made within a few days time.

If Goldman IS on the right side of the Euro trade, then it would seem to me that ANY news article you read about the situation in Europe having been mitigated, is a load of crap.

As for bond prices, I mentioned last week that the last time the 10y note put a 4 handle on (last June), led to a 9% correction in equities. Don't forget that CHICAGO OWNS NEW YORK. Whatever Bernanke does, he cannot let the long bond market get away. Recently, it's been getting tougher and tougher for the Treasury to roll over short term debt. With this Administration and Congress showing no indication that they can say "no" to any spending opportunity, the cost of funding these measures at higher yields up the curve is simply not feasible. 

It would be a lot more feasible to tank equities at this point than to let the long bond slip away. 

But these last two ideas aren't things that are understood in CRAMERICA. Cramericans will be fed a steady diet of sugar coated news. For the rest, this is your likely posture for the week ahead.