I'm long, using put credit spreads, the indexes. And I'm really uneasy. Why? Because I see no compelling reason to believe that this trend will not continue. At the same time, it's just as clear to me that this price action is the direct consequence of unprecedented government intervention. In other words, "they" want it to go up, so it's going up. Any other longs out there who find this state-of-affairs unsettling? Or, even, creepy?
The economy IS improving. It may be improving for all the wrong reasons (i.e. zero rates, gov't intervention), but it is improving. Rising stocks, falling treasury prices, and narrowing credit spreads are simply reflecting this and anticipating more of the same for 2010. This could go on for several more quarters. At some point, the gubmint will start withdrawing this artificial stimulus through higher rates, lower spending, and increased taxes. Then you will see a serious break in the economy and in stocks. This would be the 1937-38 scenario. Sadly for the bears, I think we're around 1935 right now, so they've got some time to wait.
I agree. But think of it this way: if this enormous gov't intervention was implemented during "normal" times, what would have been the result? In my view we just loaded a canon with uranium instead of gunpowder and the canonball only shot out about 50 yards. Normally, that canonball should have soared several miles.
That's all correct. In an economy as indebted as ours, it takes more and more debt to coax another $1 of growth out of it. Its a ponzi scheme of the first order. That doesn't mean that equities can't party on for a lot longer. The rally that started around the time of FDRs taking office didn't end for years. Its catalyst was the withdrawl of stimulus, raising of taxes, and a move up in interest rates. For those who want to short or get out of the market, look for those catalysts. It looks like we're getting a move in interest rates, but they're still low. Watch for the move in mortgage rates after the Fed gets out of the MBS business. Watch for BO/Congress to delay future stimulus measures. Watch for the Fed to maybe even mistakenly tighten this summer.
Ralph - you're right. Our debt based monetary system produces a diminishing rate of return when it comes to GDP growth. Long term, I am extremely doomish. As for equities, I think it's obvious that 2009 was the year for equities. I didn't see that huge run-up ahead of time, but I didn't miss out so much either because I am still a stock picker at heart. But how will equities in general perform in 2010? My view is look to the sovereign bond market. The bond market has a way of putting national leaders in their place. Stimulus globally will be greatly impeded by the bond market - depending on the country, of course. Some countries, like the PIIGS of Europe have little to no discretion and their markets will tank as a result. Other countries like the US, Japan, and the UK, that have monetary discretion will be testing the limits of the bond markets. Money is not being created in the private sector as it used to be. It's a government game now. Big time.
I'm still long also - will get short-side protection for the january dump-off, but I see 20% upside in 2010 with minimal risk downward, pending a black swan of course. There are too many reasons to list why I am long.