Thursday, July 10, 2008

(Bear) Market Update

Since I subtly indicated here last May, that the stock market was carving out a multi-year double-top, the market soon after topped out in October and has declined 20% from the top.
Below is the current updated view of the S&P 500:

Granted my market calls have been early, and cynics might say that's because I am overly zealous about anticipating the "end of the world". To which I say, mea culpa. In reality, I should really refrain from making time-based predictions, even though it's a lot of fun, especially when I am right. And in all fairness to me, who knew that Bernanke would have been so *creative* in attempting to keep the Global Ponzi Scheme alive. By all accounts, he has come up with some historically novel ways of handing tens of billions of dollars to big banks and brokerage houses to make sure they don't suffer from their own greed and stupidity. Regardless, the man from Oz has only postponed the inevitable and taken the Federal Reserve basically out of the picture. With the Fed Funds rate at a mere 2% and inflation running at the highest level in decades, the Fed really has neither the option to cut nor to raise interest rates - if they cut, then inflation will accelerate killing consumers; if they raise, then banks will fail. The next option that Bernanke has hinted he might take is to "buy" long-term U.S. government bonds aka. monetize the debt, which is tantamount to "printing money".
Regardless of my calls being early, the trajectory and velocity of the current stock market decline thoroughly validates my overall thesis. We are still very early in this overall market decline and with each step lower, more and more of my longer-term predictions will be validated.
As for the commodities market, oil is hanging in there valiantly (~$140/barrel as of today). Paradoxically, despite being a big believer in Peak Oil Reality, I think the next major move in oil will be to the downside. I base this on demand destruction from high prices, weak overall economic fundamentals and over-supply from speculators who took oil out of the markets and will be puking it back onto the markets as the decline accelerates. I am clearly not among the current cohort of deceivers trying to convince everyone that speculation plays no role in commodity prices. If you believe that, then there's this bridge over here...

Also to date, contrary to my predictions here and here, and despite the fact that this has been the most volatile market in years, the major options put sellers have seemingly not yet shit the proverbial brick. however, I suspect that this past two times that the VIX touched 30, these guys had some serious nicotine stains in their underwear. As for the full scale filling of drawers, in my opinion that event is only a matter of when, not if. After all, stupid is as stupid does, and selling puts into a decline is like selling house insurance when the house next door is already on fire.