This Is Why I Don't Time Markets

 | Nov 30, 2011 | 10:35 AM EST  | Comments
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Stock quotes in this article:

ulta

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rbs

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aeg

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mtu

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rimm

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mu

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bks

It's on days like this when I'm glad not to be a short-term trader. The global liquidity injection has markets in full-scale rally mode this morning, and this could well continue for some time. The coordinated action to increase liquidity -- by the Federal Reserve, the European Central bank and the central banks of Canada, Japan, Switzerland -- is a tip that the situation in Europe had been near crisis levels and that something had to be done.

China started the parade by lowering the reserve requirements for banks, thus providing for a jump start to the slowing economic growth rate in the world's largest emerging market. I am not sure a flood of liquidity will solve the underlying problems.

But, as Real Money Pro contributor Bob Lang pointed out to me this morning, it does kick the can a pretty good distance down the road. The moves this morning should ease traders' fears of a major European bank failure, and of a continued decline in the growth rate of China and other emerging markets.

That sizzling sound you may hear drifting from the direction of Wall Street this morning is the reason I am not a market timer or trader. That's the sound of traders with net short plays sizzling as the early-week market action has fried their positions. I know some very smart people who came into the week short based on the recent weak market action and the continuing lack of a solution in Europe. Today they will be scrambling to cover positions and stop the bleeding.

This reminds me very much of September 2007. The markets were declining, and many of us were pretty sure we were about to get paid off at last, having been fighting shorts in some of the overleveraged banks with huge exposure to the frothier real estate markets. I have never been net short in my investing life, but that's as close as I had ever been. Along with the curmudgeonly options traders and some others of the Chicago bunch, we were short names such as Corus Financial and Countrywide Credit.

The Chicago boys were much more aggressive than I, and several of them were short the big names, including Lehman, and using a ton of leverage. On the morning of Sept. 18, we came into our respective offices to see a surprise Fed rate cut that sent stocks screaming higher. It was a painful couple of months before market forces reasserted themselves. Then the averages began the slide that took us into the credit crisis.

I am not sure this is a permanent market bottom. It is a lift at a time when the pessimism had been threatening to take over the markets and the global economy. The markets will correctly take this as a sign that the world's central banks are aware the possibility that a second credit crisis is closer than anyone has wanted to admit, and that these banks will take steps to push back a replay of 2008 and 2009. I have no idea if they will succeed. But in the short run, at least, the stock markets around the world approve. I will wait for the analysis of fellow Real Money contributor Roger Arnold, and others much more versed in global macroeconomics, to figure out the long-term implications.

I know some of the more bullish and short-term readers will be sending me the usual emails. "Melvin, you were bearish and not buying last week. Aren't you one of the ones getting scorched?" Well, that is not exactly true. I was cynical and not buying last week. I have a very small position -- less than 1% of my portfolio -- in put spreads (out of the money and under water) in names that I believe are overpriced at current levels, such as Ulta Salon (ULTA). However, I am also long a lot of global financial companies, such as Royal Bank of Scotland (RBS), Aegon (AEG) and Mitsubishi UFJ (MTU). The rally is causing volatility to come in a bit, and that is helping the short puts I have in Research In Motion (RIMM), Micron Tech (MU) and Barnes and Noble (BKS). By focusing on individual stocks and trades, I can be a market agnostic.

I confess to being an optimistic cynic. I believe that the economy will recover and that real estate will improve some day, and that all of these incredibly cheap stock will soar. I am not, however, willing to chase the latest bullish case or theory, nor the bearish ones, for that matter. I rely on the numbers and view buying or selling on news as something of a crapshoot. I am not willing to bet that that liquidity moves, or a strong Black Friday, are a reason for widespread enthusiasm about stocks in general. I will continue to try and cynically ignore the noise and watch the numbers.

Columnist Conversations

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