The Dow is down 50 points, S&P down 3, and the Nasdaq is, of course, showing a gain of 8. This afterall being a POMO day, you didn't think that a GE top and bottom line miss or Bernanke throwing cool water on QE2 expectations could actually take down AAPL...did you? No, no. The primary dealers are busy using taxpayer dollars to bid up makers of hyper-discretionary electronic gadgets. Anyone who believes we need a formal QE2 announcement to continue this charade is being fooled. As long as the prospect is on the table and POMO actions inject liquidity into the PDs, the market will remain buoyant.
The real unwind in this Fed driven environment of coerced malinvestment would need to come from:
1) An external shock, such as military aggressions between sovereign nations. The flight to quality into the dollar would likely occur faster than anyone anticipates (given how oversold the dollar is ahead of a QE2 expectation) and would likely destroy risk appetite (at least in the short term.)
2) The couple of days sell-off we'd have with no QE2 announcement in November. In my opinion, it would likely give short-biased funds the opportunity to pick up some return before the end of the year, but then the mentality of, 'well if not now, then in Dec' will likely prevail and the market will resume its run higher.
3) A unexpected rise in the risk premium that indirect buyers of Treasury securities demand given the now universal understanding that the Fed intends to monetize US debt. If the 10 year started to march higher despite POMO/QE2, etc then we'd likely see a big unwind in risk as the Fed would lose both international credibility and domestic confidence in its ability to control all aspects of a globally interconnected market.
Things that will not, and have not taken the market down:
1) The technically overbought nature of the market.
2) The very high concentration of investors who are bullish.
3) The sub 20 VIX.
4) The rapidly weakening economic fundamentals.
5) The uncertain outcomes of FX wars and Smoot Hawley style protectionism.
6) European Sovereign Debt Crisis. Afterall, the ECB has stepped in to ensure that every bond auction coming out of the PIIGS gets filled.
7) The uncertainty surrounding US elections. If we have stalemate in Congress, then we obviously don't get any more of the fiscal stimulus (the job creating kind of stimulus, not the crush the middle class monetary kind...). But this fact doesn't seem to give anyone pause for thought.
8) Foreclosuregate. The financials are getting crushed this morning on heightened uncertainty surrounding liabilities related to fradulent foreclosure activity. The financials led us down in Fall 2008 and took us higher in spring 2009. Will we be back down in Fall 2010 on concerns over Financials? They tend to lead the market, and BAC, JPM, C, etc are down 5% this morning. No matter. Have no fear, Mr. Sack is here!
All of the above being said, it should be understood that the sheer size and type of challenges currently facing not just the US, but also pretty much the entire planet, virtually guarantee that:
1) No one is smart enough to reasonably handicapp all possible known unknowns and unknown unknowns. The world is awash in excess risk appetite right now. If you get one of the tails wrong, you could get slaughtered unless you are the first out the door...unlikely...
2) Policy decisions, decisions of the electorate, decisions of foreign dictators, decisions of buyers of assets and sellers of assets, etc are all the emotionally driven decisions of human beings. History has proved that human beings are falible and also at times irrational, self-destructive, short tempered, etc. When the 'fog' and confusion reaches these types of levels, people are bound to panic or do irrational things that they wouldn't do otherwise. The survivor is one who keeps a clear head when the shooting starts. Unfortunately it is very difficult to predict when the shooting will start or what will be the catalyst. It is because of this that it seems now that the most rational decision is to hold cash and wait for absolute home-runs. If we have a Black Monday (tues, whatever) then maybe its time to deploy some cash in blue chip dividend paying equities. If the S&P rises to 1350 on sustained expectation of a QE2 announcement that just isn't coming (the ultimate communication strategy...The Great Bernanke Bluff) then maybe its time to purchase a boatload of SPY puts. If gold pulls back sharply on a dollar run, then maybe its time to portfolio some of the shiny (non-cash-flowing-impossible-to-determine-appropriate- valuation) metal. If the EUR/USD goes to 1.50 maybe its time to buy the EUO. You get the point. But otherwise, unless certain special situations arise, why gamble in a HFT driven, volume-lite, government produced rally while your super ego screams for you to pay heed to reality?
In the meantime, enjoy the show.
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