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Monday, October 10, 2011

Market Thought... re-cap

Just wanted to re-cap my market thesis given today's nice move. The thesis has not changed from the previous Market Thought post, China Syndrome.

Although no actual plan came out of Europe, the actions to shore up the banks are speaking louder than words. First we had the two Greek bank merges with a Qatar capital infusion. Then Dexia organized break-up. Now, days later, another organized break-up of a smaller Greek bank Proton.

We have clear evidence the EU is not going to let a credit freeze to take place.

Going forward, the market concerns are the US recession dictated solely on one research company's (ECRI) leading indicators and a slow down in China.

As highlighted in the previous market thought post:

1. Leading indicators include consumer expectations, money supply, stock market, steel production, industrial product sales, newly started construction, non-financial service indicators, etc.  These factors can be corrupted if there are unusual shocks or discontinuations of patterns from external forces.  A Fed induced twist or China specifically stops buying copper or steal for a few weeks because they want to slow down their construction to ease up on elevated prices seem like unusual shocks to me.

2. The China-drastic-slow-down is predicated on:

- Bubble real-estate prices
- Over capacity in housing and factories
- bad local bank debts
- bad accounting (Was anyone really surprised by this? We knew this since 2002!)

There is no question all these things are bad, but China has +$3 TRILLION in reserves and an extremely under leveraged consumer.

Given the US and China's macro-economic data has not been bad enough to justify drastic earnings reductions, the market should continue to rally toward the 320 SMA.

 The market should hang around the 1200 level until the above concerns are mitigated. Obviously, if these concerns are realized the markets will decline. (see worst case market evaluation)

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