Signals and Solutions

This morning I sat through an interesting presentation by Gerry Brockelsby from Marquest Asset Management. At first I was fearing another "history lesson" in which he re-iterates the steps that led us to this awful predicament in the market. But I was pleased to find out that it was more of a "scenario builder", one where we are presented clear indications of massive upside potential (Ie. An action plan), pending one little hitch (Ie. A trigger to light the powder-keg)... Credit.

Lets look at precedence... (In this case - 1980 - Jimmy Carter - as it is the closest comparison to our problem at present.):

Similar to the illiquid situation we are in now, the Carter team effectively introduced massive credit controls which stalled lending and turned the market sharply downward. (Similar to September this year after the collapse of Lehman and the "mark-to-market" idea...). Banks stopped lending all at once! (Eventually, on a Global basis.) Looking at the "whip-saw" effect on the markets during the Carter fiasco, the credit collapse lasted roughly 1 quarter. Now, here's the scary part... We currently have 6 weeks or so to reach that full quarter duration. It is assumed, by many many smart people, that a credit collapse lasting more than 1 quarter may lead to a full economic depression. (Considering the speed of markets due to increased technology, maintaining this 3 month "buffer" is quite liberal to say the least).

So all other indicators are lined up for a great correction (or Bull run) with the only caveat to get credit moving. How then should we position ourselves? If credit is not loosened by year end, we could see extreme government measures introduced in January... (Possibly Nationalizing the entire Banking system, and government forcing credit back into the markets. Hopefully the financial system finds that "magical suppository" before anything like that happens...)

2 possibilities:

1. Credit gets moving again. Greed and all those other good measurable things return to the markets. The trillions of dollars sitting on the side-lines flood back in. We witness one of the greatest, most profitable movements in market history. (Hopefully Europe and Asia follow suit... Back on track).
or...
2. Credit stays stuck. Extreme Government intervention in the Financial system. Credit is forced back into the markets. Long term recovery, and uncertainty continues to exist in the markets due to the nationalization process... The pin-drop leading to the death of Capitalism as we know it?

Either way, it's very important to stop looking at the stories leading to this mess. To quit following and reading about who's to blame; slave to the government and media's diversions. All that is done is done.

It's also important to stop trying to call a market bottom. It's a suckers game. The funny thing is analysts will always try to "chart" and fix a thesis to call a bottom. One of them will hit the nail on the head out of luck, and taa-daa! Here's your next guru who we will all watch and listen to, and purchase their book on e-bay... Yadaa, yadaa, yadaa.....

Concentrate on position. Watch like a hawk for indications that credit is starting to move again. If it looks promising, take your positions quickly, as the speed at which the sling-shot moves will be extremely fast. I know it sounds like I'm advocating "timing the market", (which I think is next to impossible), but I'm merely trying to emphasize the importance of having your ducks in a row "before" this occurs. (Take your positions now, or yesterday, or tomorrow. As long as you can stomach the risk. I think the upside is well worth it, but that's my own opinion.)

It appears that down-side risk is being contained... Selling pressure is diminishing as stock prices are discounting all the bad news. Buying is still very timid and therefore cash continues to build on the sidelines. Again, negative market sentiment is a key ingredient to the bottoming process. Soon buying demand will surpass the selling pressure and a sustainable rally will take shape.

Hopefully the great minds and powers-that-be are ready for the challenge. We have seen some great moves by the Government and banks to restore liquidity to the system, and it's my bet that credit will get moving again before the New Year. At least that should help to shake off some of the deflationary pressure, and we can start to focus on other problems like "de-leveraging" and good-old-fashioned inflation... War... Etc...

Ahhh... This may be like waking up from a long drawn-out, bad dream; Only to find a pile of cash under your pillow where you recently placed all your teeth after the knock out punch the markets delivered in Fall of 2008... (Put a steak on it.)