New Year, What's Different?

December was a month of dancing bulls. Looked strange, with market, I mean Dow, trading in 8000-9000 range. Anyway, investment world was full of dancing bulls shouting "Stocks are so low, they can't get any lower, it's a bottom, buy, buy, buy".

Now we have a new year. Just a number in the calendar. Yeah, good rally on the first trading day of the year. Still looks like a bear market rally. And now bulls are not dancing anymore. They are running like in Pamplona. Hey bulls, do you know what happens to your Pamplona relatives in the end? Lucky ones end up killed by sword, after entertaining public. Unlucky are just sent to meat processing plant.

Let's see what's really going on. First of all, why bulls think that market can't go any lower? In years of Great Depression market fell 89% between peak in 1929 and bottom in 1932. In today's Dow points such bottom would be somewhere around 1530. At that point I myself will say that it can't go much lower. Before that, I don't know. Nobody knows.

Market is going up for several days when all news are bad? Usually it's a bullish signal. But we have a new year, which also means a new quarter. For me, it's just a number in a calendar. But for fund managers, it's time to make changes in portfolios. For bad ones, it's time to sell stuff they bought for window dressing, for good ones, to profit from such window undressing, and for the best ones, it means nothing. Current market might reflect some new trends, or just plain window undressing.

Oil is going up sharply and other commodities are going up as well, although not that fast. The common (mis)conception is that investors are preparing for coming inflation. May be. But oil jump so far is looking like typical bear market rally. And other commodities might react to different events as well.

Now, inflation. Everybody is talking about it. Fed's rate is near zero: inflation! Never mind that Japan had (and still has) it's rate near zero and they are still looking for that elusive recipe for economic revival: inflation. Obama's team preparing a massive economic stimulus: inflation! Yeah, right. Japan had stimuli as well. So far what I see is quite a modest stimulus package, and it's a big question when and in what form Congress adopts it. And several trillion dollars question, of course, is: how big should be a stimulus to revive economy? How to inject money into economy so it goes into real market, into wages, supermarkets, shops and causes some inflation, instead of going into Treasuries and dollar carry trade?

We are still in deflation mode. And deflation = depression in current economy.

I am an optimist, of sorts. I hope that some way or another we pull out of this crisis, unlike Japan. This country, my country, is way too dynamic to stay down for decades. That's why I believe that this Great Recession (if not Great Depression 2.0) will not last more than 5 years. I also hope that it will not last more than through 2011. Other than that, all bets are off. The most optimistic scenario is that we start recovering in the beginning of 2010. If market, as usual, recovers half a year before economy, real bull market might start this summer. Not now.

I'm not trading or investing on hope. No big changes for me right now. If I'm wrong and bull market prevails, long portion of my portfolio will take care of it. If we go much lower, I have cash on sidelines and will buy stocks which I feel fell too low. I'm going to close my position in TBT this month, unless some event changes my mind. And I'll try not to miss any obvious trades. Other than that, I'm neutral or slightly bearish and remain so until there is a reason to change my approach.

Full disclosure: at the time of publication author had a long position in TBT. Positions can change any time.