As I See It, Here's Where The Risk Lies

Since trading remains pretty quiet with the exception of a few select setups throughout the day, I would like to deviate a bit and discuss the market in terms of the big picture. Naturally, the commentary will have ZERO relevance as it relates to your trading today, but hopefully it will pique your interest and give you something to factor into your longer-term investment/trading plan. Also, despite my degree in Economics, I am by no means the expert, I am simply sharing my observations with you.

Deflation?  That was the big word last week from the FOMC meeting. And guess what? The market and the media got a little scared. But let me ask you a question, what products/services are you paying less for presently?

• Health Care? 
• Cable TV?
• Food?
• Gas?
• Insurance?
• Housing?
• Electricity?

I don't know where you live, but here in Southern California, it ain't cheap. Quite the contrary. So, if prices are going up, why is the "official" measurement of inflation going down? Simple, due to the way it is calculated. The Bureau of Labor Statistics factors in "improvements in the quality" of the product, i.e., you are getting a far better product, but the fact is the product takes more from your product than it did a year ago. Naturally, technology is the exception to this rule, as the cutthroat pricing in tech is startling. (Makes you wonder why people pay ridiculous prices for tech stocks when the profit margin is so little, but I digress).

But what about the Producer Price Index number that showed the biggest drop ever? Good question. Statistical anomaly? I really do not know. Let's see a series of similar numbers before drawing any conclusions.

Nonetheless, more money leaves my pocket now than it did a year ago. So I don't give a crap about what the BLS says, I am spending more money. So why the deflation mantra? In my humble opinion, the Fed needs to continue to add tremendous amounts of liquidity (lower rates, open market operations, etc.) in order to prevent the consumer and the housing sectors from slowing down, or worse yet, implode. This idea that the Fed will cut rates at any cost and "turn on that machine called a printing press" (Courtesy of that inept Fed governor Bernake) continues to fuel the belief that a recovery can be forced artificially on the economy. Hmm, 12 rate cuts have not worked, why would the 13th, 14th or 15th?

"In a scene reminiscent of the previous bubble, Greenspan has basically said, 'yields will not rise, play the steep yield curve and you will not be allowed to lose.' Bond investors are listening, equity investors may have to. It is a dangerous game, but for now it's safe to go back in the pool."

While there may be many differences between us and Japan, Japan is a perfect case of intervention gone terribly wrong. Rather than letting the weak banks fail and purge the system, they continually bail them out. The result has been a painful drift lower for better than a decade. Alan Greenspan seems to be oblivious to this and continues to believe that He is somehow capable of righting a ship that is terribly lopsided.

My point is simple. We are either on the verge of making an economic rebound, and as a result a stock market rebound, or things may get even weaker. Am I a pessimist? No, I believe I look at things rather objectively. For me, I constantly weigh the risk/reward in just about everything I do, especially trading/investing. Right now, while I remain very cautious, I still cannot see any really compelling reason to be long equities. The risk is still to the downside. Yes, the charts and the internals look good, and listening to the talking heads who are suddenly back on the tube after losing better than 50% of their investors' money in the last three years are once again being treated as financial alchemists does have a certain "jump in the pool, the water is fine" draw to it. The nagging fundamentals keep me away. For now I am quite content picking up 3%-5% in some foreign denominated CDs and simply playing the market purely from a trading basis where my time frame is so limited that my risk too is limited. Remember back in 2000? Overvaluation was always brushed aside, it did not matter...until it did matter.

While today's column was my interpretation on present day scenarios, I must give credit where credit is due. If it were not for the writing and insights of the following individuals, I would not have had the perspective to put together such a piece. I trust you found it helpful. Bill Fleckenstein, Marc Faber and Fred Hickey.

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