Wednesday, May 27, 2009

Out of the Woods, into the Forest...

I am so bullish for the last couple of months, someone might think that I caught some bug. Wrong! I'm only bullish for the nearest future. For now, this future ends in June, when window dressing is over. For the last two and a half months market is driven by sentiment. Before that, it was driven by technicals. But in the end, fundamentals matter.

I wrote many times that this time is very similar to the Great Depression, but everything is happening much faster. We went through 1929-1932 period in a year and a half. Market hit the bottom on March 9, 2009. The next big hurdle during Great Depression was in 1937, when government raised taxes to reduce deficit and eventually pay off debt. The question is: are we there yet?

There is a lot of noise from Democrats about raising taxes or adding new ones. Not all of these projects will pass Congress, but some will. States are already raising taxes. Would it be enough to push economy further into the spin? But the biggest danger right now is oil price. Interestingly enough, it has nothing to do with oil supply and demand and has everything to do with investment. There is a huge inflow of money into oil futures from hedge and pension funds right now. Oil price may become a huge tax on a world economy and kill any hope for recovery in the nearest future.

Let's make money in the current rally. But let's not forget about dangers ahead and keep watching the situation carefully.

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