Palpara Merchants

I have distain for politics and politicians, but they are market moving forces these days so we need to assess their policies’ impact on the market. Every candidate has said they would immediately fire Bernanke. They reason- the money printing machine is causing uncontrollable inflation. The disregard of facts like PPI, CPI, and most recently the Empire State’s input/output prices is worrisome. All these indicators point towards the likelihood that we are still fighting a deflationary period. The populist sentiment around phantom inflation has become a plank for the Republican platform. The absolute worst outcome from the 2012 elections would be for Bernanke and Geithner to be replaced by a new Fed Chair and Secretary that don’t have any experience from the 2008 financial crisis.

If we get a Volker-like Fed Chairman then we will be less prepared for any financial shock in the future. We may even get premature tightening in a worst-case scenario. If only the candidates would read their history books, as Bernanke has done, they would see the major errors politicians made in the 1930’s were fiscal austerity and monetary restraint. Our debt has already forced us to repeat one of those mistakes on the fiscal side. We are dangerously close to repeating the monetary mistakes of the 1930’s given the Presidents’ approval rating and the inferred outcome of the 2012 elections.

The banks have been a disaster for over a year. I don’t see any end to the decline until we find out who our president will be. Any lift is ephemeral until we know Bernanke will not be replaced by a new Volker.

In trading, receiving and comprehending the latest news quicker than somebody else is what gives you “the edge”.  But we live in a world submersed in”Breaking News!” The problem with the internet and a 24-hour news cycle is that it has taught us to have a micro attention span. The news that has been plastered all over the TV about Greece has been around for a year. I hear the Soc Gen story made it to the mainstream media- we sold off on Soc Gen a month ago. The August sell off was blamed on the debt-deal debacle at the time. It’s now morphed into worries about a Greece default rippling through the European banks and contagion reaching our banks, and causing a recession.

The problem with buying into this thesis is the time component of the contagion is unknowable. By the time this story makes it to the mainstream media, it’s probably already been priced in to the extent that the event is eminent. The default most likely will occur, and that most likely will cause a bank like Soc Gen to default on it’s obligations which will hurt some other banks and funds. But there can be a lot of time in between now and then. We can rally for a while until we go down again on the same news about Greece.

That’s why we have to monitor sentiment. We finally got an increase in the number of bears on the Investor Intelligence survey. The idea of an eminent demise in the market has finally set in enough to get most of the market participants skewed towards the ursine side. This means most market participants fearing the inevitable default have already acted- they’ve already sold everything they wanted to.

The best thing we can get in order to have a chance at a sustained rally is for it to be hated. We need any strength to be hated by commentators. It means we’ve got a market of sold-out bulls who didn’t trust the rally and sold their already lean long inventory into strength. That means cash on the sidelines, eager for a home.  Watch the sentiment, watch the semis, and watch the financials. The fly in the ointment is copper. It’s signaling a recession, but there are too many other good indicators to give copper too much credence.