I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Saturday, February 27, 2010

A Request to Bearish Bloggers, the State of the Emperors Attire, and Watched Pots

Okay, fair warning, this is another one of binv's crazy idea posts. But bear with me, I think the request part has some merit and I think the ideas I present will at the very least be a good read.

What are chances of this post actually mattering or accomplishing its goals: Well I put the odds of a big name bearish blogger actually reading this post at 1 in 10000 and the odds of them actually trying out this idea at another 1 in 10000. So I think this post has a 1 in 100 million chance of having an impact or conversely will be 99.9999999% ineffective. .... never tell me the odds :)

Basic Premise and Request

I want all of the bearish bloggers to tone down the overly bearish rhetoric for one month.

.... Whaaaaa? binv, what are you smoking?

Hear me out. I have a basis for this crazy idea. I actually had a very similar idea back in August: Do Your Part to Help End the Current Bull Market. Become a Bull!, but the conditions were not ripe for a top nor did I make a request as focused as this one is.

So I wrote in December that conditions are ripe for a top (The Long View). But if conditions are ripe, why am I asking bearish bloggers to ease off? Aren't things already in motion for the bearish case?

First off, nobody knows if this is the top or not. Not me, you, Robert Prechter, Marc Faber, Larry Kudlow, Jim Rogers, Paul Krugman or Nouriel Roubini. And like I have said before, whether this is the exact top or not, the only way we will know is after there is a confirmation move, and here is what one could look like: What To Look For As a Long Term Trend Change Confirmation.

But shouldn't the bearish bloggers continue to point out the problems? Shouldn't we continue to show that point of view?

In short: no.

The market is already extremely polarized. The bulls are exceptionally bullish (crisis averted, Dow 15000, financial system stabilized, etc.) and the bears are exceptionally bearish. There are very few who are agnostic on the market right now.

So what does ringing the alarm bell do when everybody has already chosen a side?

But if you subscribe to the bearish scenario, you want to see hubris peak again. Hubris had a very strong peak in Dec and January, with bullish sentiment indicators from a number of different measurement sources near all time highs.

Remember markets climb a wall of worry and fall down a slope of hope.

The Emperor Isn't Wearing Any Clothes (Almost)

The point that many of us bearish bloggers make is that the "recovery" was a product of a bounce off extremely oversold conditions in March and extreme fear. There was never any compelling bottom in valuations on a number of different fronts (earnings, book value or dividend yields). The GDP "growth" was a function of government spending and an inventory rebuild cycle (read: unsustainable).

And I bet any bullish reader reading this (which is highly unlikely) is getting angry and saying I am wrong / taking these things out of context.

That is more or less my point. These developments are not bullish and pointing out the unsustainability of the recovery and the fact that none of the underlying problems being fixed just gives fuel to the bulls "climbing the wall of worry".

It is like pointing out that the Emperor is *about* to be naked.

That doesn't work.

In March the Emperor was wearing a parka and several layers of thermal underwear. His attire was getting much more skimpy from March to November. In December and January, when many us of bearish bloggers were loudly pointing out problems and demonstrating the topping behavior on many indices across the developed world, the Emperor was wearing a Speedo.

But he was not naked. Saying he is "practically" naked doesn't work. So yelling "the Emperor has no clothes!" gives him an opportunity to put a t-shirt back on.

To catch the market with it's "pants down" they really have to be off.

So what I am saying is hubris and over-confidence needs to return. The Emperor really needs to be naked when the call comes that he isn't wearing any clothes. And the only way for him to be naked is for his charlatan dressers to convince him that "he looks maaahhh-velous" and to parade around Wall St. in his birthday suit.

Let me put this another way:

The Watched Pot Never Boils

On Caps there have been a lot of posts stating to the effect that "its okay to be bullish because the number of bearish posts have been increasing"

And you know what? That thought is absolutely right.

Because there is no such thing as "the market" and we all engage in it from the outside, separately. All of us, our words, actions, probably even our thoughts, make the market

Peaks happen at extreme sentiment, when everybody is one-side on a trade. They don't happen when there are a large number of people calling for the fall.

The watched pot never boils.

And bearishness did pick up back in January. There was quite a shift in sentiment. And in looking back on how that played out (Jan-Feb), it was almost a "too perfect" momentum change.

So What am I Asking?

I am *not* asking for the bears to stop being bearish. Hell, I am extremely bearish. I am asking for the bears to not be "loud about their bearishness".

We need to catch the Emperor naked and we need to stop anticipating a boiling pot and just listen for the clear whistle of a trend change.

Many of the bears are a) already positioned for a crash, and there are far more b) who will jump on board when the momentum changes.

I am asking for the group a) bears (such as myself and fellow bearish bloggers) to tone down the rhetoric so that hubris can re-peak unimpeded.

Please continue to post News and articles that show bearish developments, please continue with Technical Analysis and Wave Counts. We are all trying to understand the environment. Just refrain from the overly bearish rhetoric so that bullish complacency can return.

"Why do you hate the market so much binve?"

.... I DON'T!!!!

I am not bearish for the sake of being a bear. I would much rather be long. I would much rather be bullish. I am a very optimistic guy, and I want to invest in companies and the US economy for the long term. But when I honestly assess the problems that our economy faces in the near term (next couple of years) and the actions that have been taken to deal with those problems, I am utterly unconvinced that they are being solved or in some cases even taken seriously.

This is ultimately why I believe that the current environment suggests that investors should still be very defensive. That is my honest $0.02. I have no agenda other than to call things like I see them.

But my real beef with this stupid rally is that it is suckering in so many people and the only way to stop that is to just end the charade quickly.

If I actually believed that this really was a recovery, actual and sustainable, then I would be all over it.

I want to be long, and in fact I have no doubt that we will completely rebuild our economy and I will be 100% on board. I will become the most bullish investor you have ever seen.

.... but that day is not today, and other than a short bounce (in the grand scheme) that day was not March 9, 2009

I am not a "the world is ending, stock your bunker" bear.

I have a 5 month old daughter. I am not calling for the end of the economy because I want her to grow up in Mad Max's world! I want the economy to purge itself of its excesses so that we can rebuild our economy while America is still a very strong country and to clean the Financial house.

And that will not happen until we acknowledge the underlying problems and fix them. Yes, it will suck and be painful. But for the long term sustainability of the US economy, it is mandatory.

I want to leave my daughter an honest economy and a bright economic future.

.... So.

To the bearish bloggers: Tone down rhetoric for one month. And lets see if this market might give us the turn we are looking for. Patiently and quietly.
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