Wednesday, March 4, 2009

Selling The Rally

Jim Cramer was like a kid with a pound of candy. Hurrah! Mr. President said something about stock market! Something which even sounds sensible! So what? Barack Obama actually said that stocks are at low valuations and it might be a good time to buy. Sure, trailing P/E is very low right now. The problem is, E in that formula is going down hard. P/E might be low now, but after next round of quarterly reports it will be much higher. It's called multiple compression, explained in detail in the book of one James J Cramer "Real Money: Sane Investment in an Insane World".

I have deep respect for our President. He is one of the greatest politicians I know. And he inherited this mess, and his administration has to improvise, without any blueprint, because the we are in Great Depression 2.0 (I hope Larry Summers already explained that to Obama), last one happened 80 years ago and current economy is completely different from what was then. But so far anything President says about economy causes market to sell. And sell hard. He might pretend that stock market is not important, that Wall Street is the last of his worries, that Main Street shouldn't worry about stock market. Wrong! Main Street has majority of retirement money in stock or bond market, both are on Wall Street. Economy is too much interconnected.

I was wrong about bear market rally. I expected it yesterday, it happened today. Well, right or wrong, but in this market discipline requires selling into the rally. And sell I did. I sold my Research in Motion (RIMM) position, I think that 10% in two days qualifies for oversized gain. I also sold half of my Australian And New Zealand Banking Group (ANZYBY.PK). Banks aren't worth anything anymore, anywhere in the world, they are to be sold. There will be time to pick up remaining pieces of banking system. Maybe next year. Maybe in 2011. But not now.

I still think that RIMM is a terrific company, but discipline trumps conviction. I think I can buy it back somewhere in 30s. Opportunities are made up easier than losses.

I'm still not sure about direction of this market. I want to believe that we had local bottom on Tuesday, technicals are telling me that. But tiny voice in the back of my head is telling me that may be this rally happened (and didn't fade) because President didn't say a word publicly about economy today. In other words, this market is traded as much on government action as on technicals, and I'm not privy to what will be said tomorrow.

Full disclosure: at the time of publication author had a long position in ANZBY.PK and no positions in RIMM. Positions can change any time.

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