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The Week Ahead

Published on June 22, 2009

The Week Ahead

June 22, 2009

RIMM free trade that was shared here delivered a +19%, an excellent trade for two days holding period. Hope you have been in touch with the blog posts either via RSS or via basic blog membership.

The coming week will see a flurry of economic data, the biggest one being FOMC announcement on Wednesday 2:15pm US EST. Fed is expected to leave rates unchanged. This will also observe a huge Bill auctions, and markets, as we saw last week, may be volatile depending upon success of these auctions.

Existing Home sales data will be released on Tuesday. Durable good orders, New Home sales and FOMC meeting minutes will drive Wednesday crazy. GDP number as well as Jobless claims announcements will set the tone of market opening on Thursday. Personal Income and consumer sentiment will be stepping stones for Friday’s market beat.

Before even all this is released, The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed. It lowered its forecast for the global economy to contract 2.9 percent this year, compared with a prior estimate of a 1.7 percent decline. Global growth will return next year with a 2 percent expansion, the bank said, cutting its forecast from a 2.3 percent prediction about three months ago.

I shall also encourage OP readers to read an excellent article written by John Hussman of Hussman funds (The Outlook is Not Up, But Very Widely Sideways); John has done an excellent job in explaining what does “money on the sidelines” really mean.

Cash does not ever find a “home” in a secondary market. Every time you hear the phrase “investors are putting money into…” or “investors are taking money out of …” or “money is flowing out of … and into …,” it is a signal that the speaker is unable to distinguish a secondary market from a primary one.

“As I used to teach my students, if Mickey sells his money market fund to buy stocks from Ricky, the money market fund has to sell some of its T-bills or commercial paper to Nicky, whose cash goes to Mickey, who uses the cash to buy stocks from Ricky. In the end, the cash that was held by Nicky is now held by Ricky, the money market securities that were held by Mickey are now held by Nicky, and the stock that was held by Ricky is now held by Mickey. There may have been some change in the relative prices between cash, money market securities and stocks, depending on which of the three was most eager, but there is precisely the same amount of “cash on the sidelines” after that set of transactions as there was before it.

“I’m similarly convinced that Wall Street has no idea what it’s talking about when it uses the word “liquidity.” While using the phrase “global liquidity” lends a further element of worldly sophistication, Wall Street still hasn’t the slightest idea what it’s talking about. The phenomenon that’s being called “liquidity” is nothing more than a combination of fiscal irresponsibility and risk blindness, and will ultimately prove itself to be the time-bomb that it is when investors begin to “re-price” that risk.

All of that is as true now as it was at the time in 2007, when the S&P 500 was above 1400. Investors hoping to ride a “wave of liquidity” may eventually discover that the wave leads to a plunge over the falls.”

OP’s Bottomline – I have been and am still bearish. But I want to keep options open for limited upside as well. For OPNewsletter, we are prepared for either direction with slightly short portfolio delta.

Profitable Trading, OP

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