Sunday, October 9, 2011

Is it time to go long?

Is it time to go long equities again? While it is possible that some kind of low was in, I am not ready to dip the toe in the water yet, let alone jump in it. There are chances that while dipping the toe to test the water, we might lose the foot altogether. The European drama is far from over and unless a definitive course of action is implemented, we might see more violent market actions. Moreover, the Fed has not yet come out with more free money for the TBTF banks.  So no sustainable rally can be expected yet.

So far as the Greek drama is concerned, Greece has been in default for 140 years out of last 200 years. So what makes you think that they will not default again? The following are from John Mauldin;

“Greece used its access to low rates that came along with the euro to borrow and increase the wages of government workers, until the Greek train system, for instance, had €100 million in revenue and €400 million in salaries, with another €300 million in expenses. A government-sponsored retirement plan for some 600 different "hazardous" jobs (like hairdressing and radio work) was available at 50 years of age”

And now the Greeks are rioting on the street because their privileged lifestyle is being threatened? How long before Germany either throws Greece out of Euro or quits itself? I think till they figure out how much they need to recapitalize their banks. That may well be within the next six to eight months. And if and when Greece gets a haircut or restructuring of its lazy bum loans, Ireland will ask for its fair share and so will Spain, Portugal and yes, Italy. Euro zone will need between two trillion to six trillion euro to re capitalize its banks and tide over the bad loans. Do they have that kind of money? I doubt it very much. So my views of the long term prospect of the Euro zone and the world economy is pretty much certain.

But that does not mean we will roll over tomorrow. The central bankers and governments of the western world, including the US government, will do their best to prevent a Lehman type situation by pumping more and more liquidity. That is the only solution they know and that effort is already underway. We can see that happening with ECB agreeing to buy bonds of Spain and Italy, BOE injecting more money in the system and BOJ also joining the liquidity pumping operation. We are just waiting for the FED to join the party and we may not have to wait for long. With so much liquidity being thrown in the system, we might see short term ISM turning up and economy showing some life again. The net result, we should be seeing a yearend rally starting possibly by late October.

 I am monitoring various indicators to decide if that rally is going to have any traction at all and if it is worth going long equities by end of October. For now though, it is better to wait outside and not join the game even on the short side.