As longtime readers know, I usually have pretty big opinions on a host of subjects. (That is not to say I always get it right -- I don't.)
But given the exceptionally complex financial landscape, I find it hard right now to have a strong opinion about what the stock market road map for 2009 may look like.
There are massive forces working against each other. On the one hand, we have enormous fiscal and monetary stimuli. On the other hand, we have the undertow of the collapsed housing/credit bubble, which resulted in the near vaporization of the financial system last year.
Were it not for the imagination of Treasury chief Hank Paulson and Federal Reserve chief Ben Bernanke, the financial system would have vaporized. In fact, we came within a gnat's eyebrow of that outcome, which has created a tremendous undertow for the financial markets, as well as for business and general confidence in the economy.
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(Of course, Bernanke, the Fed, Paulson and Wall Street got us into this mess, as did other government regulators who didn't do their jobs. But that's another subject, which I've covered ad nauseam.)
- Play the videos to the right for more insight on the economy.
In any case, the fear of what all of that leads to, combined with the damage already done, continues to prod governments to come up with ever-larger stimulus packages as these two forces continue to thrash it out. My opinion -- and I have my biases -- is that at some point it will be clearer which force gains the upper hand, and that will make it easier to decide whether to be long or short, and how aggressively.
I firmly believe there will be at least one very good shorting opportunity by midyear, and I suspect that later this year there will be a very good investment opportunity on the long side.
But at this juncture, it's difficult to ferret out how and when those opportunities will set themselves up. Thus, this is one of those moments when it may really pay to be more liquid and flexible. In essence, I prefer to react more and predict less this year until the road map becomes clearer.
This uncertain rally
As for the rally under way, my thought is that it will end more quickly than people expect (like now-ish) or last longer than they expect. Given how giddy some folks have become and how frisky many stocks have gotten (relative to the news), I could argue that the rally will last a bit longer. On the other hand, given how dicey the environment still is, I could argue that the rally will end quickly.I must admit I'm rather shocked at how many "investment professionals" have concocted a second-half-recovery story for the stock market. This, of course, sets up the possibility of rationalizing away all bad news, causing the rally to last longer. I suspect we will get a better handle on how this may play out when we start to see the market's response to bad news, in the form of first-quarter pre-announcements and earnings reports.
We saw some disappointment this past week, but given the size of the rally from November's lows, that setback may have been just noise.
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Why the bailouts aren't workingThe money that the Fed and Treasury are giving away is going right back to the Fed. The financial fixes haven't worked, MSN Money's Jim Jubak says, because banks aren't lending out the money.
We'll also need to keep an eye on credit markets to see what sort of healing process takes place there. The extent to which credit spreads tighten and broken debt instruments start to fetch bids will determine how long the rally lasts. But again, I think all we can do is have an idea of what we're looking for and then hope to react as data points fall into place.
On the long side (other than precious-metals names), I would say the names to focus on would be the obvious infrastructure companies. (I'm sure folks can come up with their own lists. I don't have a solid one yet.)
I also happen to think the energy patch may be a worthwhile place to research.
Continued: A soft spot for software
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