Q: How many bears does it take to change a light bulb?

A: 100. One to change it and 99 to calculate how much money they’ll make in the next depression.

I am encouraged by how many people vehemently believe we are headed for a depression. I say ‘encouraged’ because a plethora of poorly thought-out negative opinions is normally a bullish signal. Hoping for a depression is often a trap for new traders and one I certainly fell into a few years ago. Once you learn about how to make money from a falling market – for example, shorting stocks or buying put options – the idea of a crash can be quite exciting. It isn’t that traders want people around them to suffer (except perhaps the analyst in that now infamous BBC interview - see www.bbc.co.uk/news/business-15078419), it is just that the numbers are so captivating. There is an element of ‘keeping up with the Joneses’ involved too - or maybe waving to them as they sail past in the opposite direction.

We can bang on about U.S. debt ‘till the cows come home and yes, it is bad and there are some tough decisions or huge innovations required to redress the balance. However, none of this talk specifies what level of debt is really ‘too much’. People aren’t going to wake up one day and stop buying U.S. bonds. A catalyst is needed.

As I posted recently: “The nature of a crash is that it is totally unexpected.” If all the carry-on going around at the moment is to be believed, ‘this time it’s different!’ Thanks to the internet and social media, this time many will see the crash coming before it happens. Talk about a contradiction!

There is now talk of potential progress in Europe. Suggestions that countries not meeting certain EU criteria would be required to hand over key aspects of fiscal sovereignty could well make for a stronger European Union. As the details are hammered out, I would not be surprised to see one last panic for the year ahead of some renewed strength.

On the bigger picture, I am still bullish overall for the next 18-24 months. Simple definitions of bull and bear markets are a rally greater than 20% and a decline greater than 20% respectively. As Birinyi & Associates have said time and time again over the last two years, by this measure we have been in a bull market since the low of March, 2009 - the S&P 500 is still up more than 80% from that low. We have not had a 20% decline (based on the close) in that period either, although we went very close in August!

Chart 1 – S&P 500

click chart for more detail
click to enlarge

Birinyi also made these rather apt comments recently, lamenting the lack of proper analysis and research:

“We wonder if – given the complexity of today’s world and the interplay of finance and politics – if there has ever been such a period of misinformation, limited analysis, superficial research, and casual use of the term ‘expert’.”

I would have to agree. These comments also remind me of their earlier remarks about the media, taken from the bestseller ‘The Girl with the Dragon Tattoo’, by Stieg Larsson.

“In the world of financial reporting, the normal journalistic mandate to undertake critical investigations and objectively report findings to the reader, need not apply.”

I am not a European political analyst. I can however apply some basic logic: Yes, the EU could fall apart, but realistically that isn’t actually in many people’s interests and if that threat becomes stark, then brinkmanship and immovable positions should disappear. Even if we are waiting for the other shoe to drop in Europe, it isn’t like these scenarios haven’t been canvassed ad nauseam over the last twelve months. Unless there is a nasty surprise in store, another panic would more likely mark the beginning of the end of this episode, rather than the beginning of the end for the world as we know it.

Combine this with all the negative market sentiment, lots of cash and attractive stock fundamentals and you have the reasons for my positive bias.

Happy Trading

Jordan Craw