One Observer's Rationale for Continued Caution
With DJIA currently up over 100 pts this Mon.AM, one can
certainly question remaining bearish. Although the
Japanese have announced banking reform, of a sort,
it has yet to be implemented and So. Korea was off
last night by -4.3%. US markets are ignoring the later
and rallying again on the basis of other investors' reactions.
The following reasons are why I will remain cautious and
will not add to my equity exposure.
(1) IMHO the underpinnings for my previous bullish investment
posture have mostly been removed and the risk/reward
balance now tilted toward Intermediate US Treasuries. The
corporate earnings outlook has been reduced by the slowing
economic climate. Odds of a recession have also been slightly
increased by fallout from currency devaluations and attendant
asset devaluations in Asia.
(2) October 1997 market drop is unlike predecessor
declines during 1991-to-date run up. In particular,
the current yield curve is flattening and exhibits an
ominous potential for inversion, i.e.recession.
(3) Federal Reserve may have intervened in the US
equity markets during the Wednesday night trading
session on November 11 among other potential dates.
While this assertion is difficult to verify, I will keep my
eyes on the December FX Activity Report ( 6 week lag in reporting
and published by Peter Fisher's group and formerly known as
the Cross Report, for Sam Cross) for "hidden" or
"non-major" currency intervention during the month of October.
Last night's action in Japan also smacks of massive governmental
intervention by MOF through the life and pension accounts.
I learned (profitably) long ago to fade government intervention action.
(3) Current trading, IMHO, is far more predicated on a
"buy the dip" mentality than fundamentally based on
earnings which will now not grow at pre-August
assumptions. Yet, "the market" believes old highs
could even be tested "by Christmas." Trading to avoid foregone
opportunity gains is a sure way to experience actual
losses, in my book.
(4) The downside has serious implications for global
markets and greatly concerns me. The upside is limited by either
(a) Fed rate increases, (b) Japanese bond selling, or ( c) market imposed equity decreases related to deflation. Of course, I could
be wrong, but I do not think current stock price valuations
compensate me for these risks... perceptions or otherwise.
(5) Barring unforeseen information, I may further
reduce my equity positions during rallys. At that point,
my continued participation would only be through a few LEAPS,
existing private placements or new opportunities that meet my
criteria. (Buying at book value is still okay with me.<g>)
FWIW, I am still holding my Jan OEX puts with a view to Thursday's
AMAT conference call. Although catching a rebounding market
can be exhilarating, I prefer to remain cautious and measure
the length of the bungee cord before I leap in again.<g>
Good trading all.
PS I'll be very busy today and will check return posts tonight. |
