Tuesday, February 27, 2007

Five Things That Would Turn My Bullish Perspective More Bearish

The following originally appeared in The Edge on TheStreet.com's Street Insight on 2/26/07

I am on record saying that my S&P index growth target would be 15% for 2007 with that index closing in the low 1600s at the end of the year. Right now I am sticking to that prediction. Looking into the future, I also see a good start to 2008 followed by a prolonged sluggish several months into the presidential election with a year end bullish run. That 2008 playbook is still in developmental stages of thought and I will likely be modifying and solidifying it as this year progresses.

Here are the five things that would most turn my bullish perspective to ursine in the future:

1. Inflation. Not this namby-pamby inflation that everyone has spent the last two years arguing over. You know the constant bickering about the inflationary effects of the difference between 2.5% and 3.0 or 3.5% inflation. I am talking real, hard-core, Jimmy-Carter-is-back-in-charge, high-single-digit/double-digit inflation where you bought eggs and milk on Friday because by Monday it might cost significantly more.

2. Job losses. The US continues to create jobs, not to mention jobs that are not even reported by the Bureau of Labor Statistics. Once we endure prolonged declines in jobs, i.e. job losses for let's say 3 consecutive months, then I say trouble is at hand. Another telltale sign is once the Big 5 Broker-Dealer/Investment Banks start to cut heads.

3. A big credit crunch. Not just sub-prime problems but an across the board removal of liquidity from the system. I think that the real key is in the commercial credit markets rather than the consumer credit market. Once commercial credit dries up we have a huge problem. The current sub-prime issue is similar to that of Long Term Capital Management which I was involved with. LTCM's failure caused a revaluation of credit requirements for OTC derivatives and extension of credit to hedge funds as asset classes but did not shut down liquidity across the entire system. In fact, quite the opposite, the FOMC increased liquidity to combat fear over a systemic failure emanating from LTCM.

4. An exogenous event. The unpredictable. It could be another oil embargo. Perhaps a terrorist attack. Maybe one of those Dr. Strangelove wannabes in South Korea or Iran or elsewhere does something really stupid.

5. Capitulation on the part of the shorts. Large-scale reductions in short interest. Closing down of several large dedicated short funds. When these guys have felt too much pain, the tipping point will have been reached.

No comments: