Old Is New In Investing

Few new interesting ideas lately on how the post crash market will reconstruct itself. Now everyone knows how various sectors of the economy have suffered, and finding new arguments for investing is tough. The contrarian view or "climbing a wall of worry" has become the primary explanation for the equities rally since March. Investing experts have also reverted to the "lots of cash on the sidelines" reasoning which identifies the astonishing insight managers use every day in plowing under billions of dollars. More clever analysis might find other reasons for the reluctance to invest, but scared shitless does work.

The risk models, which caused so much grief for hedge funds, had a poor understanding of illiquidity in declining markets. But they have no problem with anything in rising markets. Just in case, some have now been replaced by models which employ sophisticated guessing techniques as to which way the markets will turn next. This is done by rapidly analyzing all the potential current information, positive and negative, and then throwing out the negative. So far it is working.

But the most reliable historical reasoning tool for investing in stocks must be the " where else can one go model". This reduces all analytics into a choice as the where best to apply carefully honed skills in betting. Pick a sector of the economy that is working. Of course that would exclude most banking, retail, autos, and construction. Then pick the best performing company stock in that sector and hope all the cash on the sidelines chases your position. This worked for years but can end badly.

Up Good Down Bad

Just about every Bear has brought down their flag and conceded the worst is over, that economic conditions, while still lousy overall, will probably prove the rally in stocks is valid. Repeated surges to new recovery highs has left no other apparent explanation for the weary.

Macro views of market activity are usually traveling at about half the speed of professional trade ideas, but even for larger managers, the turning of big positions, promotes directional plays, as it makes life so much easier. The hedge industry is obviously attached to the bull side because it is easier to invest trade than it is to trade trade. Their recent performance recovery this year is evidence again there are few great thinkers running the biggest of funds. Making money on the up and getting hammered on the down says it all.

The zero rate interest rate policy of the Fed has helped stocks to rally simply as a function of providing one of the few liquid investment opportunities. The lack of sellers after such a large liquidation cycle of 2008 and early 2009, has amplified price moves hinged on investment strategies chasing lower prices. Extrapolating a recovery trend and possibly much more is what the herd will always follow and has historically been the story for stocks. But zero rates may create a dilemma in the way things used to work as current successful Treasury auctions continue to show a world of risk aversion. A policy of simply saving the higher orders of banking/investment firms does not insure economic growth. Injecting cash and cutting overhead does work but with obvious limitations.

This rally is a trade first with the complications associated with rapid deceleration when it ends. The ensuing scramble with banners declaring the second round of the world is ending will be as shallow as the current victory celebrations.

US/China Juiced

US/China trade fight will certainly gain attention especially when there has been a juicing of stocks and commodities by trading operations filing behind huge speculation plays coming out of the China. The double down bets in areas such as technology stocks could become a exceptionally volatile unwinding affair if there is a trade event not foreseen by the information edge boys. This along with China's increasing threat to all financial markets as they increasingly juggle huge stimulus programs, needed to keep their economic positions afloat, next to the need to keep the masses from scaling the walls.

Murky Rally

Stock analysts' projections of the inevitable rise and run of stock prices due to their claim of an undervalued stock market has continually contributed to the rally which has battered the Bears, and a group held in such low regard, I am talking about the analysts now, that have been able to survive on unemployable murky skills, almost as murky and unemployable as economists. But there they are, pumping stocks despite all the leaking waterlines of nearly every sector of the economy. They trot out analogue and historical earnings ratios of now broken industries and place a rally sticker on anything that is below their valuations.

Of course it is crap. But crap is the fantasy which powers the very essence of the Wall Street investment community, make up a story, securitize it, only take what you can steal, and then sell useless insurance against a raid on fantasy values where there is no market, just their mark. Lifting bales of stimulus money has not been easy when also worrying about public image, and a system, now gamed forever by forceful Fed and Treasury policies which have come to prove what everyone has always known, politics and Washington, investments and information, and money, belong to the makers.