It seems that my latest edition of Insights & Indictments was warmly received by the bullish crowd, many of whom reached out to me to thank me for my optimism.
I'm sorry to burst your bubbles, but I am not a raging bull (but thank you for asking).
In fact, I'm still bearish.
There's a big difference between being bullish and playing all stocks (and other asset classes) from the long (that means "buy") side... and judiciously buying select momentum stocks with fat dividend yields, which is what I was recommending.
I was talking about taking the path of least resistance, which I identified as "upward," based on equity activity so far in 2012. You've heard the old adage "the trend is your friend." Well, that's what I was talking about. The trend has been up.
I'm bearish because I'm afraid of a European meltdown and a "hard landing" in China.
But there's a huge danger in missing what could be the beginning of a real bull market.
So, it makes sense to start putting on solid positions and even speculating here and there. But I am not all in - not yet. However, the time is coming. But, that is also the problem.
I'm fearful that a crash is coming, and maybe soon. If we get one, and everything flushes out and we get a capitulation bottom amidst a global panic sell-off, then I'll be all in, all the way, for the long-term. I'm talking about loading the boat up with stocks and commodities and enjoying a generational ride that will last for maybe 10 years, or more.
What keeps me up at night now, however, is the echo of 2007.
I call where we are now 2007.2. If we are facing 2007.2, then 2008.2 will follow with a vengeance.
I'm guessing the breakdown could come in the second quarter of this year (although it could also take as long as 18 months to develop, which would only make it 10 times as bad when it does come).
Think about what I'm about to lay out for you, and ask yourself,
what if he's right?
Back in 2007...
In the spring of 2007, U.S. Treasury Secretary Henry Paulson, when addressing problems surfacing in the subprime mortgages arena said things "appear to be contained." Fed Chairman Ben Bernanke said, "We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited."Comforting words, right?
Then, speaking to members of the Federal Reserve Bank of Chicago in May of 2007, Bernanke said, "Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market."
Comforting words, right?
Even before two Bear Stearns hedge funds imploded in June of 2007, the Fed Chairman was touting the virtues of derivatives and the widespread sale of mortgage-backed securities when he stated, "The key thing to remember is that these losses are not just held by American banks, as the bad loans were in Japan (referring to Japan's lost decade), but they are dispersed."
Comforting words, right?
Then, on August 9, 2007, after one Bear fund was shut down and the other fund temporary propped by an injection of some $3.2 billion from Bear itself, and the seemingly contained fallout from subprime and AAA mortgages hitting "dispersed" banks in Europe, the European Central Bank's website quietly announced that the ECB would provide as much funding as banks might wish to borrow at only 4%.
What was happening was that European banks weren't lending to each other. The commercial paper market was at a standstill, and there was no short-term funding facility open wide enough to finance their longer-term mortgage positions. And they couldn't sell their positions because after the Bear funds imploded, there were no buyers for mortgage bonds, even the super-senior AAA tranches many European banks and all the big American banks were holding.
Two hours later, 49 banks borrowed three times what they were usually asking to borrow. And by the time trading closed in the U.S. on that same day, gold had spiked higher, as had safe-haven U.S. treasuries.
Of course, the equity markets were doing their own thing and were rising that summer, nearing new all-time highs (which they would reach in September 2007).
It took another year before we got our "Lehman moment." But,
boy did it hurt.