Thursday, May 14, 2009

Devils Advocate

Devil's Advocate

Since my current macro thesis calls for lower equity prices(particularly in financials, reits and other leveraged garbage companies) I thought about making some counter arguments against a bearish view in stocks and the US economy

1 - The Yield Curve is suggesting recovery. People who ignore the Yield Curve are usually wrong

2- Housing Affordability is reaching generational levels

Some housing experts believe that a particular level of home prices is not what drives demand but actually housing cost against income, with mortgage rates so low AND prices dropping affordability is rising. Perhaps Case Shiller will surprise everyone by bottoming earlier

3 - IMF Research on Financial Crisis suggest financial crisis recessions last 5.5 quarters on average and syncronized recessions last 4.5 quarters on average. So far this US recession has lasted a little more than 5 quarters so a bottom could be around the corner

4- Private Banks might not be lending a lot but the US government is taking over the role of a lender(The so called Minsky Solution). TALF, fed facilities(like the Commercial Paper facility) are substituting the private sector and helping support credit. Those programs can surprise on the upside by getting more traction, in fact TALF for CMBS could start a big bailout of REITs and prevent GGP type failures

5 - US stocks already went down by 60% or so from peak to through its silly to keep pounding on the same bearish thesis as the risk reward is getting terrible and risk premiums and projected returns are rising. Experienced short sellers such as Jim Chanos follow this disciplined approach, he is out of short selling financials and beaten down sectors due a 'asymetrical risk reward relationship' he says he will let 'others pick up the last $10 a share'. There is a lot of wisdom behind this theory, in fact its pounding on the same thesis what destroyed Citigroup, Bear Sterns, Boone Pickens, Dwight Anderson, Tech Stock investors, others. In fact when you have markets going one way or the other in a straight line at turning points a lot of people will go broke because its natural to look at the 'fundamentals' in a very biased way when you have huge profits. People will make up excuses to stay in the trade

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