Is it Different This Time?
Research for Online Investors

by John Dalt

10/12/10

When David Tepper appeared on CNBC Sept. 24th, it was almost like everyone decided “It is different this time.”  The market bought into the idea that the Federal Reserve would print money until we could all retire and then somehow miraculously pull away the punch bowl just in time to save us from vicious inflation.

We wrote in A Put on the Market, David Tepper of Appaloosa Management was on CNBC last Friday morning and described the Fed’s actions as a “Put” on the stock market. “Either the economy is going to get better by itself in the next three months—what assets are going to do well? Stocks are going to do well, bonds won’t do so well, gold won’t do as well,” Tepper said. “Or the economy is not going to pick up in the next three months and the Fed is going to come in with” quantitative easing. In this case everything does well except bonds.

According to Mr. Tepper, it is like “Heads I win, Tails I win.”   If the economy recovers all will be ok and stock prices will rise with increased economic activity.  If the economy falters, the Fed would step in and print money until the economy succumbs to being “cash whipped.”

There are so many ‘rules’ to follow when investing, what should we do, when they seem to be in conflict?  Should we “Trade with the Trend” and “Don’t fight the tape,” or “Be Greedy when others are fearful, and fearful when others are greedy.”  One of our other favorites is “Buy the rumor, and sell the news.”

How do we treat the perception that the Fed is going to pump money into the economy, if it needs it?  Is this the “Rumor” we are supposed to buy and then sell once we receive confirmation?  For a peak, look at the VIX.

Monday was a holiday with bond houses, banks and the Post Office closed.  We saw the lowest volume of the year in the markets.  The VIX fell out of bed, dropping 8.5% in one day.  The VIX is a market indicator of expected volatility.  As traders and investors become confident, the VIX moves lower, when they are nervous the VIX moves higher.  What is the VIX telling us?  Traders and investors feel they are in control, they are comfortable with the market, they feel warm and fuzzy.  Does that mean we should be “fearful” because others are “greedy?”

How do we trade the trend?  The short term trend is UP, as shown in the following Point and Finger chart of the S&P 500.  The point of trading the trend is that it is dangerous to ‘tell’ the market what to do.  We should wait for the market to tell us what it wants to do, and then go along for the ride.

Hindsight is always 20/20; to go long now looks to be like jumping on a bandwagon that is speeding towards a hairpin curve.  What happens if the market can close above 1170?  Are we going to challenge the April high of 1217?

Now that we know the stimulus didn’t work, the first round of quantitative easing didn’t work, the national health care bill isn’t working, taxes are going higher in January, and the EPA is preparing ‘cap and trade’ whether congress and the public likes it or not.  Are things better?  Do we feel more confident in the future?

The market is telling us YES, but we wonder what the market and the VIX will look like in one month, after the “News” of Quantitative Easing 2” is confirmed.  Our inclination is to sit our hands and watch the parade.  Sell into the rallies and build some dry powder.

Quote:
In my opinion, there are two key concepts that investors must master: value and cycles.---Howard Marks

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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