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Monday, March 26, 2007


the swinging pendulum

i've found it very difficult to come to grips over time with investing long. it has always seemed to me that, as a risk-averse person, knowing that ponzi finance more often than not drives bull markets, knowing that ponzi finance ends quickly and devastatingly, it was simply too much to ask to put one's hard-won fortune on the line. i've sought to mitigate the risk in any number of ways -- including not participating -- but in the end, you have to be in at least some of the time to win.

the fact that i'm finding it easier to get in based upon a long-short technical construct that, in a blatant bit of hyperreality, i consider to be both rewarding AND secure may itself be signal of a top in this four-and-a-half-year bull.

moreover, the signs of a top are literally everywhere. economically, the housing market jitterbug has ended and is nosing over into what promises to be an event with only depression-era precedents -- probably, not possibly, down 50-70% in real terms in many markets -- even as mainstream sources continue to dissemble fraudulent tales about how the damage will be minor. retail has been flat for a year and may now be following housing as mortgage equity withdrawal and the construction sector -- source of much of the bull's real economic fuel -- both unwind and essentially end. indeed, transport, steel and bank data have now begun to indicate the onset of a credit crunch. closer to the markets, margin debt is once again at roaring 20's levels and mutual fund cash is at all-time lows. and perhaps most interestingly, the careless hubris of jim cramer -- "symbol of the bull market" -- is a ringing bell of complacency.

the three engines -- corporate stock buybacks, price-insensitive foreign central bank purchasing and petrodollar recycling -- continue apace, and the hubris of the market is largely just a consequence of it.

but for how long? corporate profits are now declining. the oil rally has been paused. china is creating the world's largest asset diversification fund. the dollar is falling again.

bill cara put an excellent analysis in this week which outlines why this is probably the final leg of the great bull of 2002-7.

So, what is happening today is that inflation data, housing data, mortgage banking data, and so forth, if it can’t be buggered beyond belief, will be ignored.

Why? Well, that’s another hypothesis I have. It is to give the US Administration, the Fed, Humungous Bank & Broker and Friends and Family sufficient time to line up their ducks (ie, put options, stock sales, M&A deals, and so forth).

The equity market is not going higher because corporate fundamentals and guidance are pulling it up, but because a very few vested interests are pushing it higher. And they will do it until they can’t do it any longer. But by then they will have rotated their sectors, told their lies, and prepared themselves for the other side of the pendulum’s swing.

as cramer implied, it is the fiction that counts -- the market itself is a bit of hyperreality that is thoroughly contrived and managed by any number of interested parties. but the consequences are real -- and when that pendulum swings, i fear that this could be one of the epic financial collapses in american history. the imbalances against are so unprecedented, so vast as to beggar description.

with problems now seeming to appear everywhere and volatility escalating, the market is being characterized by many as somehow healthily climbing a wall of worry. that's a fit axiom for march 2003, but probably not march 2007. indeed, i wonder i the tipping point won't come very suddenly indeed.

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