Well, the “recovery” has begun. TIME magazine has declared the banking crisis over and CNBC’s Steve Liesman is charting the various types of recoveries we can expect to see. Readers know I don’t believe we’re out of the woods, but rather in for what John Mauldin would call a “muddle through” recovery. With that said, the current market represents what appears like a home run trade (buy financials on the back of what will certainly be “better than expected” earnings), but the complacency of participants is spectacular right now. The recovery is becoming a widely accepted fact, sentiment is wildly positive and there is evidence that the small investor is piling back into stocks. My skepticism is wide ranging. Today’s oil data and the massive supply on the market is very bearish, the bond market has not confirmed the equity market rally, my risk metrics are at record levels for this bear market and GM’s bankruptcy is being overlooked almost entirely.
As I said last Wednesday, I don’t think you can short this market yet, but the risks presented are still too high to get long with any conviction. Reader Alex asked me if I was going to buy financials and GS heading into earnings. Tearing a page out of Buffett’s strategy playbook – I never buy something I can’t understand and the financials cannot be understood right now. I am completely convinced that the banks are all nearly insolvent if they mark their assets properly and that this quarter of profits is not only unsustainable, but almost entirely due to fancy accounting, AIG dealings, a robust refinancing environment and an upward sloping yield curve. The only one of these impacts that is sustainable for more than a quarter is the yield curve and that will only add to the fact that banking is bound to become a very boring low growth business again.
This long winded post is my way of saying that hedging strategies and high cash levels are likely to achieve the best risk adjusted returnss in the months ahead….