Evening Update - December 8, 2008

Remember, oh so long ago, when everyone was looking for market capitulation to signal the bottom? I haven't heard the word in over two weeks, and yet I didn't hear a single person state that they'd witnessed a capitulation of any type. We're up 20% since the 11/21/08 low; it's so much to handle that even I'm a little drunk with the thought of it. I have to keep reminding myself of the bigger picture - the major trend is bearish and bear market rallies happen. I'd love to believe that this is the start of a significant, once in a lifetime run out of the abyss. But when the buzz wears off, the old guy with the bags under his eyes in the mirror is still "you" (or me in this case).

No matter your perspective, list the facts as you understand them, favorable on one side of the page and unfavorable on the other.

Reasons things are gonna be just fine: Market's up 20% the last couple of weeks. Um, my brain dump is slowing down a little after that one. Give me a minute, I must have another reason to be bullish.

Will earnings be better next quarter? Do you think GDP will "shrink less? (Is that a good thing, by the way?)

If you were a bank, would you start helping homeowners now that you've gotten wind that the federal government is going to take care of it without you (with 4.5% mortgages)? If you jump to open up the credit markets, wouldn't you look stupid if the feds trumped your idea a week later and made your venture worthless? Corporate debt is pegged to LIBOR - does any bank know if they'll get a decent return on any of that money (since they don't control LIBOR), even if the debtor is a great credit, when a much-lower refinancing from the government might supplant your efforts as a banker?

If you couldn't afford the house you are in, and you are deciding between giving up eating out or skipping a mortgage payment for the first time, which one sounds like it will create greater personal sacrifice for you?

If you were the CEO of a public company, would you take any risk at all? You already do not have a single shareholder to support you, since virtually all companies have lost half their market value over the last year. Do you look smart if you do not lay people off? What if you really don't need to lay people off? Is that what it takes to keep the wolves at bay? I'm not so old to "remember" the era when people were loyal to their employers, but I understand it was really a function of the loyalty of the employers, not the gullibility of the employees. If a single CEO stood up and said, "our people are important, we are not laying any of them off, and that shouldn't be a problem since our stock is already valued so low as to correct for the 'extra' cost of keeping our employees on the payroll." Nope, layoffs are en vogue. How far can the pendulum swing if we decide it is cool to lay off more and more people?

If you were an entrepreneur looking to capitalize on the dislocation in the real estate and mortgage industry, how could you possibly act with all the changes that happen between bedtime and morning coffee?

The Fed, Treasury and Congress are now victims of their own actions - they've made a globe of entitlement. Why should anyone act until (a) the freebies stop and (b) we know the new rules of engagement? They are afraid to stop because the fall will be so very hard, and yet, as long as they do not stop, no one will know where the floor will be. They seek a soft landing but have convinced everyone that we're falling from 10,000 feet without a parachute, and they alone are the last resort for salvation. Entrepreneurship has no place in this calamity, they have been picked out of the play. They have not embraced socialist ideologue so much as they have made risk-taking outright foolish. It isn't investor capitulation that we need to mark the bottom; we need government capitulation to mark the beginning of the bottoming process. As long as they keep trying, then we know that they think it is worse than they say it is. Actions speak louder than words.

And today's version of "the answer?" Quality jobs building roads and bridges. Puleez. I think the some of the reasons the 50's were a great time to live was because (a) homes were extremely affordable, in spite of mortgage rates being higher than they've been the last 10 years, (b) frugality was as cherished as "honor" and "integrity," and (c) hard work really could get you higher than whatever you were born into. A guy building roads could earn a decent wage, support his family and probably save some dough. (And he would pack a lunch with leftovers from dinner the night before, which was almost always not eaten from a take-out container or the grocery store deli.) What sons and daughters of ours will have any of these dynamics in their lives while they are holding a walkie-talkie and a stop sign with their college degrees?

A lot of good will come of the economic decline for sure. Portions will get smaller at restaurants and Type II diabetes will fade. Immigration won't even be talked about, what with all the unemployed civilians eating humble pie and realizing that "flipping burgers" and mowing lawns is in fact an honest day's pay. I even hear that sex in marriage is up as a recreation activity, since you don't have to drive to go there and it doesn't cost anything.

I'd love to hear if anyone has more than one reason why it's all going to turn around from here. Especially since the "one reason," the market run-up, is going to have it's test and leave everyone wondering again, sooner or later. It would be nice to know if people have more than a wing, prayer and a bear market rally to hang their hopes upon.

In the meantime, let's talk about the S&P. Another interesting day today. 919 proved to be the top, as predicted (sorry, couldn't help myself). It really was a day for the bulls - a gap up open that never closed, and an intraday high not seen since November 10th. Today, we gapped up, didn't close the gap, opened and closed above the 20 period moving average and touched the downward trendline. All this two days after the upper bollinger band crossed below the 50 day moving average, spectacular. And we've gained over 20% since the last low.

I could have written the same comments about November 4th. Well, the bollinger cross thing happened one day, not two days, before the last time all these things happened. But on November 4th, we finished a 20% run up since the last low, gapped up, touched the trendline, and opened and closed above the 20 day moving average. We lost 36% in the next 12 sessions. If we repeat that, we see 680 on the S&P before Christmas.

We're as close as we've been to the 50 day moving average since late September, take that out and this bear market rally gets interesting. Still, shorting the rallies hasn't failed as a strategy yet, and until your list of reasons why it's all gonna be ok is longer than your list of what is left to go wrong, it's still the smart bet.

Tomorrow's action - key for the bulls it's all about taking out 919. The pivot points once again tell the whole story - the pivot is 896, pretty much where we closed today (and where the futures are as of this rambling). R1 is 922, the bull threshold that needs to get broken for the rally to legitimize itself, and S1 is 874, right around where we closed last Friday. Worth mentioning is S2, 848, a level that has to be tested before an honest broker can say we've bottomed. 944 is R2 and if we get there by some off-chance, we might as well test the November 10 high of 952. That's way too bullish for me as it would have us breaking above the 50 day moving average and I just don't see the fire in the belly. Today, I bought March puts when the S&P hit 919 and tomorrow I'll be doing the same if we get to that level. While it is possible that we'll see 950 in the next few days, it is extremely probable that we'll see 800 or lower again before February. I like the risk/reward on that one.

Night,

Joe