Was last week a gift from
heavens? Is worst over? These are questions that everyone is asking himself/herself as we head into a new week with a head of steam and a northerly directional bias. Have rains cleared, has lava cooled? Or was last week a sick joke of nature, sort of like duck-billed platypus? Was it only natural that markets finally rebounded? I know I’m supposed to be answering these questions, not asking them, but I have to throw questions and topics out there before tackling them. The short answer is I’m not sure to any of questions above, but let’s view them from all sides and see what we come up with.
First, I don’t think there was divine intervention involved in last week’s action. I do believe that there were certain events in America that probably answered a few prayers. (By way, if those trapped miners in Pennsylvania had been rescued during week, it would have provided a spark to action. Though comparisons are unfair I couldn’t help but think of how decisive response to emergency was compared to Russian attempt to save Kursk a few years ago.)
The biggest prayer was one seeped in anger and even hatred, and that was for open arrest of a big-time CEO. When Regas family was led away in cuffs, market was already climbing off mat, but news supercharged rebound effort and many speculators that had been waiting patiently found themselves in a position where they had to jump first and ask questions later.
It almost makes Americans come across as Huns, but blood lust was at top of many disgruntled investors wish lists. Still, that wasn't type of gift that has a very long shelf life. It was a momentary situation that only whets our appetites for more. However, investors cannot live on revenge alone. They need shelter of a strong economy, warmth of growing earnings, and of course safety from a system of checks and balances that work.
So that takes us to question number two, is worst over? I’d say worst isn’t over, if consumers stop spending, if there are more high profile scandals (I can’t believe how many of Wall Streets top pros are saying that companies like Citibank are buys on weakness because they’re too big for government to topple or expose) or if corporate profits don’t return (deflation is still a greater probability than a double dip recession).
Yes rains cleared for a few days but clouds of doubt still hover above. I'd say either stay in Ark or near gangplank. The lava has cooled, but it is still too hot to relax or drop one's guard. Yes, this market is like an animal that doesn't know if it is fowl or fish. So far this year, those that have felt that worst was over have suffered cruelty from stock market. It would be absurd not to still show vigilance to such possibilities again.
That brings me to even more sinister thoughts and questions. Was last week’s gift a Trojan horse? The shorts are always going to short. It becomes a lot more difficult for them to spread their message and manipulate market if forward PE for S&P is below 20, as opposed to above 30.
Sometimes they pick certain points to cover and lure in anxious watchers that have had cash burning a hole in their pockets. The ensuing rally provides them with another chance to re-short market and spread their message of doom with better conviction. I think shorts last week had little choice on Wednesday except to get out of way. But, they’ll be back.
