Sunday Musings: Seeing Both Sides

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Todd Harrison at Minyanville brought up some interesting points in “Strap Yourself in Goose:”

My greatest strength is knowing what I don’t know. Stay humble, I’ve learned, or the market will do it for you.

What I do know is this: There is a massive disconnect right now between the credit markets and the equity space.

If credit can catch a bid and spreads narrow, we’ll see a fierce upside move that will rival anything in recent memory.

If credit doesn’t improve—or worse, continues to deteriorate—the DJIA could shave 1000-1500 points before most folks know what hits them.

The cynic would say “Great—you’re saying we’ll either rally or sell-off, that’s great value added!”

I would counter that the principal purpose of a trader—and by extension, my role in Minyanville—is to identify, measure and communicate risk.

The rubber band is stretched about as far as it can go.

That’s been my thinking all along that the markets have been going sideways and a breakout is due to occur—sooner or later. If there is any measurable or at least perceived improvement in the credit markets, we will see a break to the upside. An indication of that was last Friday’s sharp turn-around on the news that a solution for the bond insurers’ problems is being worked on. Not that a solution had been found, only that one is being considered.

On the other hand, from my vantage point, I simply can’t see right now how this cesspool of bad investments can be cleaned up without further write-downs and/or massive borrowings on the part of the involved banks and brokerage firms.

While I don’t let my personal opinions interfere with my investment decisions, the scale is still level. Sooner or later an event will create a tipping point which subsequently will produce the next major trend. Until that happens, we simply have to sit tight and be patient, which is not something most investors are accustomed to or very good at.

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