Musings from the Editor:
Worries Aside…A Hidden Message?

Well, we’ve come through the tricky month of September and managed to close out the 3rd quarter in fairly decent fashion, all things considered. As things stand now, the broad indices are flagging bull, with both the INDU and the SPX within relatively easy distance of tagging historical highs in very short order.

With such a backdrop, you’d think the world was at peace and things stood in good order…not so much. Not gonna find many peeps that will argue against the fact that the world is a mess.

Moreover, we would appear to stand poised for resolution on a number of key macroeconomic and geopolitical fronts (fair to say dangerous in some cases) as we head into the 4th quarter…no small matters, to be sure. It’s not hyperbole to state that a number of theissues at hand might well shape things positively or negatively for some time to come.

What all this is gonna mean for the markets and us as traders remains to be seen. While I am one who veers toward being informed and influenced almost entirely by price action, failure to attempt to gain some perspective on the big picture is a fool’s game.

Home-Front Issues

In the U.S., we are faced with the just initiated QE3, which has been met so far with the enthusiasm of Rocky VI. While the allure of cheap money and a guaranteed window of Fed accommodation is appetizing, the fact is things are heading in the wrong direction on a number of key economic fronts and this is a bit of desperation by a Fed that is growing increasingly concerned we will slip yet again into recession. That doesn’t mean that the move can’t or won’t help, but we do need to see it for what it is and what it implies—the long-awaited light at the end of the tunnel may not be at hand…a depressing prospect, given the expectations built into this year in terms of recovery.

We also have the fiscal cliff just over the horizon and the implications there are huge. Frankly, neither side wants to deal with the fallout, but the intervening election makes it impossible to do anything for the time being. So it would appear we are again set for a theatrical production of last-minute gamesmanship in Washington. Hopefully this time around the pols will come to agreement before lasting damage is done.

Speaking of the election, we will soon enough be delivered (for now) from the deluge of commercials, daily polling data, non-stop news coverage and the paid hoard of prognosticators employed by both sides to convince us they are the party offering real answers.

For now we can expect the rhetoric to step-up in more shrill fashion leading to November 6th. No doubt we’ll be treated to more generous helpings of the ol ditty “this is the most important election of our lifetimes” mantra bandied about by self-interested pols. It may in fact be true this around, given the state of the country and the world, but we’ve heard it all too many times and there are few left that believe the notion that “who” sits atop the throne in DC will have any real effect on where we go from here.

Looking abroad…

Middle East

The Middle East has always been a powder keg and the West has long maintained a penchant for misreading the tea leaves in that part of the world, as it were. The most pressing concern is the nuclear issue in Iran and the increasing isolation on the part of the Israelis in the region, given the Arab Spring developments and fallout. Don’t misunderstand that for taking sides or assigning blame. Simply an observation on the lay of the land as it stands now.

While the players in the region are decidedly at odds, what’s equally troubling is the fact that while leaders the world over have long-feared a nuclear-armed Iran and have sworn that such would not come to pass, collectively (ourselves included) they’ve done little more than dance about and skirt the hard issue.

Well, the time of saber-rattling and gamesmanship may well be morphing into a much more dangerous form. We’ve convinced ourselves for many years we could control this issue and it would somehow work itself out. We are only now waking to the fact that we have no real control or sway in the region. We lack the political will do anything, so the Israelis have now put a true redline in place. Agree or disagree with their stance or our approach, fact is we’ve disengaged and punted on the issue—now we are forced to sit back and hope.

Don’t know bout you, but I find this to be the scariest situation facing the entire world and there really is no overstating how ugly and disrupting this entire scenario could become.

Beyond the threat of war in that region, we are left with the reality that oil prices stand to sharply climb (baring some sort of positive resolution between the parties) due to disruption concerns and the accompanying fear premium that will drive up the price of crude. Such an increase could easily topple our nascent recovery and drive the economies of Europe deeper still into recession.


What hasn’t been said about Europe? Odds are still very much in favor of a Greek default. And other members of the PIGS remain very much in peril, sans the Irish. The focus is on Spain for now, but the issue has always been the shared currency and lack of a central bank with the power to specifically address the concerns of each individual member of the Union. Oh, and the hard core stance taken by the Germans. Well, not to blame them… they are simply acting in their own best interest, which is a core tenet of economic theory—we all do it.

While the situation remains acute, the fact is the world has become accustomed to the notion of the Euro doing a deep six and the Union itself breaking apart…if it comes to that. While this entire tragic drama has play out painfully slow and has caused tremendous disruption throughout the global markets for several years now, this may turn out to be one instance where the “kicking the can down the road” approach on the part of European politicians may have actually worked to their benefit and ours.

That said, the problems remain myriad…and they can and will bring us down if they unwind further still. But on a comparative basis, the situation is not near what it was this time last year. Bottom line, they are in a recession and will be for some time to come…and thereafter growth will remain anemic for some time to come. But they aren’t going away and however it plays out (with some or none exiting the EU) the European parties will emerge and once again exercise collective muscle on the world stage.


The big-red engine has slowed considerably in this past year. They have been the driver for quite some time and have been a counterbalance to the problems in the West during the course of the financial crisis, so this is indeed a problem. Safe to say the fears they might stumble, which in turn would likely torpedo recoveries in economies the world over, have come to pass…more so in Europe than anywhere else.

Exacerbating the issue of slowing growth is the fact we remain largely ignorant when it comes to China and its economy. While we can gauge the health of our economy and that of most other areas of the world, we continue to fly blind when it comes to what is fast emerging as the second most dominant player in the world. Tis fair to say that guessing the “hows” and “whens” regarding growth in an economy of such import is not the prescribed approach when it comes to managing our own economy.

But guessing is in fact what we are doing…and will continue to do until such time as we strengthen bonds and our overall relationship. There’s certainly lots of
questions to be answered, such as where it is headed, how it will assume it’s role as a super power, how it will do when forced to carry the weight of the world (as the U.S. has done for decades), whether they will truly open their borders and markets to the rest of us, yadayadayada…

The one thing we do understand for certain is that the government there is very pragmatic. While they may cheat at trade, prop up numbers/cook the books at the corporate and governmental levels, engage in shenanigans with their currency, etc., we can count on them to throw a whole lot of money and resources at keeping their economy bustling. Translated, while Europe and the U.S. are hamstrung, China is flush and will take all necessary measures to move forward themselves and the rest of us. Sure there will be bumps, but betting against them and their ability to “spend” the rest of us into growth is not a bet I’d take.

Comparatively Viewed

Serious issues all, to be sure. Plenty of reason to believe we are in for some sharp reversal from these near-record levels. Well, there you have it…end of story…

Not to be a nudge, but I wouldn’t mind throwing out one or a couple simple questions before setting out to short the market… With the backdrop being what it is, why are we parked where we find ourselves? Is this nothing more than a pratfall setup that stands ready to ensnare the bulls and believers? That might very well be the case.

On the other hand, maybe there’s some method and logic to the fact markets here are poised near historical levels. Might it be that the market has discounted all information, as it is supposed to do, and having engaged in an exercise of relative/comparative analysis, decided that the picture is better than would appear?

Running a bit with this mindset, it’s worth considering where we’ve come from and what we’ve dealt with in the past dozen plus years—pretty amazing stuff. What’s most surprising is that we remain far from healed. In fact, we’ve accomplished little in addressing those issues that got us to this state in the first place.

In that sense, we are very much like Rocky. We’ve had the hell beaten out of us and acted terribly (sorry to you Stallone fans out there), yet bloodied and bruised we continue to stand. Economies here and abroad continue to function. And it’s fair to say we are probably closer to the end of this mess than the beginning at this point.

Perhaps that is the message of this market…

Look, I certainly have no idea where things are gonna go…nobody but the fool will claim such knowledge. I wouldn’t be surprised to see the INDU and SPX u-turn today and provide us with yet another October downside surprise. Frankly there’s no need to spend much time contemplating that scenario. Suffice it to say that were the markets to tail-turn and head abruptly south, it will be perceived as a very negative signal…one many will view as a “Tell” that we are gonna backslide into recession, further extending this painful period. A downer, to be sure, but not total calamity.

On the other hand, what might an upside break represent? Maybe nothing at all. Or, maybe such a move would signal something well beyond a bullish technical trigger for the broad markets. Would it be foolish or naïve to view it as recognition on the part of the market that the underpinnings of real healing are in place, combined with a view that the horizon holds promise for organic growth within our economy.

Pollyannaish? Perhaps…

Trust me, I’m not going out on a limb to guess “what ifs” or to read tea leaves. But it’s worth noting as we enter the new quarter that unexpected catalysts have emerged
in the past that turned decidedly bad periods around. The release of the Iranian hostages is a good example. Some would even argue the US Olympic hockey victory around that same time changed our mindset and became a catalyst for renewed hope. The same can be said for the collapse of the Soviet Union, poignantly punctuated by the fall of the Berlin Wall. Historic events all that positively influenced our psyche and our desire to engage in the markets.

Can the emergence from the turmoil of the past dozen or so years be placed in the same category or given the same weight? Dunno… we shall see. But the fact is we have come through the worst economic period since the Depression. We have existed for some time on the brink of economic disaster. Yet we have come through it all intact…changed, but very much still in the game.

Moreover, when you put things into perspective, we have survived in this past decade just about anything you could possibly envision, short of nuclear war. Ironically, that is more of a real possibility today than at any time since the Cuban Missile Crisis.

Notwithstanding such a chilling prospect, the question at hand is whether there is indeed a message in the market for us to discern?

Time will tell…



Louis entered the biz in the late 80s and spent over a decade working as a trader, instilling him with unique insight into trading and the markets. In 1998 he switched gears to become the group editorial director for a large network of award-winning, trading-focused newsletters. In 2002 he became the founding editor-in-chief for two financial trade magazines—each served approx. 40,000 independent financial advisers nationwide. He’s appeared on business TV, in the business press and on numerous biz-focused radio programs in the past. He writes market commentary and analysis most days and trades on a daily basis.

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