Sunday, July 25, 2010

Fractured Fairy Tales

¹²Fractured Fairy Tales: Goldilocks, "Exit Strategy," And "Austerity"

By Bill Fleckenstein | July 2010

Weekend newspapers were quite grim and markets that were open on the first Monday in July traded lower. There was no shortage of reasons for that angst, but one making the rounds— i.e., the notion that governments worldwide will enact strict austerity measures— I find somewhat preposterous.

A Bloomberg story gave weight to that illusion with the headline, "Deficits Shrinking Most In Decades," as it turned a theory— namely that fiscal policy is about get 'quite tight'— into a reality. While it's true that some austerity measures have been proposed, nothing has taken place, and we all know how cheap talk is, especially in government circles. Given the serious problems inside the European banking system, not to mention economic and employment issues both in Europe and here, I do not think that austerity is going to make it very far past the planning stages. Much like Bernanke's "exit strategy" received a great deal of attention for a while, but has since been forgotten, as the opposite strategy, Q.E. II, seems far more likely.

Make Sure You Don't Abandon The Wrong Ship

As for "where we are," the fact that, coming into early July, the Nasdaq 100 and S&P 500 had both seen fairly extended runs of negative days, certainly added to the bearish mentality, even making bears out of many of those who generally are bulls. For instance, Barton Biggs (who had been bullish recently when the market was a fair bit higher) stated that he had cut his allocation to stocks nearly in half, and in particular was selling big cap tech stocks. As longtime readers know, I am no generic stock bull, but if I had to be bullish on something, it would be big cap tech. They are not particularly expensive by recent standards, they all have strong balance sheets, a lot of cash, and are mostly winners worldwide.

In other words, this is one area where America excels and which benefits from Asia's growth. (One caveat on valuation, however: just because the price-to-earnings ratios are lower than they have been does not mean they can't go lower.) Thus, if I had to make a bullish bet through earnings season, big cap tech would be my choice. (And if Bennie starts to hint at launching Q.E. II, a rally might even get frisky.)

I have more or less done that with my position in Microsoft, because— as I've said ad nauseam— if I can't win with Microsoft (given how well-positioned it is), I don't think I can win with anything. I feel that given the recent carnage and angst, there is a reasonable probability of a decent rally getting underway. However, it would be just that: a rally. If it plays out along those lines, it will probably be time to think seriously about putting on some shorts. [[Say, about August?: normxxx]]

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