The Bearish Cacophony

 | Oct 24, 2011 | 7:07 AM EDT
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So far this earnings season I have not heard a single management say that their business has been set back yet by Europe. Not one. But I have heard many say, "Sure, if it gets worse, it could hurt us -- but our stock reflects that possibility."

 Until the end of last week, the market was saying, "I don't believe you." However, I think last week we began to get a budding consensus that perhaps 1.) There could be a resolution in Europe, some resolution, any resolution, and 2.) That resolution will make the worst-case scenario be the wrong scenario, which means, 3.) That stocks deserve to trade higher.

 It is a stunning one-two punch when you think about it: The companies haven't seen weakness from the crisis, and the crisis might actually be resolved.

Isn't that a tad Pollyannish?

Of course. Yet, that's precisely why the smart money is so short. They know that everything good is too good to be true. They know that every positive is met by a double negative and they know the problem is too big for any country or entity to handle.

 Will the "smart" money continue to say the companies are too upbeat and the valuations too high?

I think so, because here's how they look at things.

(First,) the fact that the balance sheets of most corporations are magnificent doesn't matter. That's because (second) when Greece defaults, all of the credit default swaps in the world will be triggered which will (third) force the governments to either bail out all of the banks that wrote the insurance that obviously can't pay, which will then (fourth) trigger downgrades of countries that will (fifth) cause selling of "risk" assets, which means (sixth) all of those good earnings don't matter because stocks will go down because they are all parts of indices, which means (seventh) stay short or you will miss that big credit default swaps moment that links everything to everyone and causes a crash.

The fact that it hasn't happened yet, that the chain reaction is still out there, has to do with the fact that Greece then Spain and then Italy have to collapse, and that they must take down all of the banks, so who cares companies have credit? No one will need it because Europe is bigger than all of us.

So, why not just short more?

Which is what I predict will happen today. That moment where Greece defaults which causes insurance to kick in which causes other countries to default which causes more insurance to kick in which then causes France and Germany to bail out which causes the downgrades which then triggers the worldwide crash is every bit as "game on" for these guys as ever.

Why would you ever, then, want to miss it?

Anything that is said by any corporation is meaningless in front of this litany. Any budding consensus that "earnings are better than expected" is simply not responsive to the dialectic.

So, brace yourself. Nothing matters. The averages go up? That doesn't matter. The better-than-expected earnings? They don't matter.

The credit default swaps.

That's all that matters, at least if you are an intellectual running money.

The guys making all of the money right now on the long side?

To the smart money, they are all idiots.

Rich idiots, sure.

But idiots nonetheless.

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