Cosa Stai Pensando, Signor Birinyi? ~ The Risk Averse Alert

Monday, November 23, 2009

Cosa Stai Pensando, Signor Birinyi?

Appearing on Bloomberg this afternoon, stock market psychology specialist Laszlo Birinyi, Jr. made a few remarks I'd like to respond to.

Let's begin with Mr. Birinyi's belief that, among "economists, strategists, and technicians ... there's not a whole lot of actual research — basic research — rolling up your sleeves and digging down and getting the data and coming to the reality ... and that has been a characteristic of the market for some time."

This might explain why we presently find so few investment newsletter writers who are bearish. Yet wouldn't you know it, Mr. Birinyi is not among this group. No sir. And why not? Well, because...

"Technicians have been telling us literally for six months that this rally is not sustainable because it doesn't have volume. ... I would contend if you go back historically you would find volume is not necessarily a significant ingredient of most bull markets."

NYSE weekly

Well, then, shall we call increasing volume over the duration of one monstrous bull market from 1974-2007 but a mere coincidence?

I think not, because the market climbs a wall of worry, and this worry is reflected by an increasing volume of shares offered up for sale. What makes for a bull market is the fact that, this increasing supply is absorbed at ever-higher prices.

True, there often are periods in the midst of rising prices when volume will tail off. And though this condition might not portend imminent trouble, it remains one worthy of concern — a red flag, if you will. Complacency (such as is revealed by a diminishing volume of shares offered up for sale during a market advance over some duration) is a fatal disease at the periphery of risk assets, which is precisely where equity lives.

Now, Mr. Birinyi probably has his own, unique standard for defining what he calls a "bull market." His likely entails a most minimal loss endurance tolerance, and probably requires a much shorter view toward pending possibilities. Yet, then again, one wonders about this given his concluding remarks today...

"The important thing is that our clients get good investment ideas ... and from a longer term perspective we've argued that, this market has a lot of similarities, structurally, to 1982, which means we could carry on for another couple years."

Was Uncle Sam all in with its backstopping of derivative securities in 1982? Did mortgage-backed securities (MBS) even exist then? Was financing of Treasury debt so completely dependent on the kindness of strangers? Was the physical, goods-producing economy so thoroughly decimated? What further de-industrialization now awaits our exporting overseas? Was the consumer so completely buried under a mountain of debt amidst collapsing collateral values?

1982? Cosa stai pensando, Signor Birinyi? What are you thinking?

And furthermore, Signor Mercato Psicologia Esperto, what do you make of the very fact that, as you say...

"We increasingly find the financial press to be more pliant and accommodating, and less penetrating."

Do you suppose there is a reason why this is more so true now than was the case in 1982 — a reason reflective of the true state of the market? Might this be symptomatic of an attempt to attract the dumbest of dumb money into the riskiest of financial assets at a time when systemic risk has never in centuries been so elevated?

I do not overstate the present risk for dramatic effect! The danger is unmistakable.

"Less penetrating" ... as in unwilling to make the connection between the productive capacity of a physical economy and its ability to sustain the viability of finance necessary for its functioning?

"Less penetrating" ... as in refusing to question the very legitimacy of a mountain of casino side bets?

"Less penetrating" ... as in pretending a slow, deliberate effort (or is it deliberately slow?) at imposing a necessary measure of regulatory oversight might be sufficient to buy enough time for the economy to regain stable footing, much as our nation's Treasury Secretary blindly believes inevitable?

"Less penetrating" ... as in throwing out the most ridiculous of trial balloons as could suggest our incompetent Treasury Secretary might better be replaced by Wall Street's worst liar?

And of the aristocratic interests who fortify all things Wall Street — including a pliant, accommodating, less penetrating press — might one also admit that, as a matter of consensus among such self-appointed masters of finance, the type simply would not have it any other way, for these are in fact the philosophical heirs to those whose misdeeds, indeed, precipitated the American Revolution ... and so, therefore, whatever might be done to degrade the principle of a free press will be done, and most skillfully, too, under cover of promise of great fortunes to be made?

Hey, it was a good gig while it lasted, but now we come to the most damning difference separating the present moment from 1982. The nation is in a rage and on the verge of exploding. Just listen carefully to Senator Mike Enzi, speaking on the effort to "reform" (read: gut) the nation's health care system...

"And they're still mad."

Which means a pliant, accommodating, less penetrating press is about as much of an issue these days as is censorship in China. In other words, it ain't 1982, Mr. Birinyi. Rather, it is more like 1343.

Well, well, well ... looks like a courageous effort at hedging short equity positions met today's manifestation of "mutual fund Monday" (which, if you listen to Pete Najarian's comments during today's Word on the Street, apparently has been something of a trend over the past few months). Yet I wonder if too much certainty in this hedged position is revealed?

Might this go some way toward a suspicion expressed here last week, wherein continuation of the 3-month and running circle jerk thus far endured since July's monster short squeeze was thought possible? All I know is, much like the rest of the short side of the trade, I am increasingly loathe to call a top because the talent on Wall Street is in a sweet spot where milking goats requires only a bit more time than is needed for cows.

No doubt, there is much reason to believe that, more downside risk than upside potential exists at the moment. However, this does not mean the market is likely to imminently fall apart. Don't get me wrong. It could. But a trip back down to the lower end of trading over the past few months instead might be in store, followed by still more CME-driven fun (much like today's was but another instance of many we've seen since March bottom) manufactured to facilitate a further offloading of dead equity into some of the dumbest institutional hands on the planet: mutual funds.

Fast Money
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