Does Any of This Sound Familiar?

The following premium content was originally published on the PRO Trader Service on Wednesday, 11-July at 6:06 am

I begin the day with an E.N.P. of roughly 70% net short as I continue to lean to the bearish side. As June came to an end with the S&P500 at 1362 I was about 95% net short. My Effective Net Position has since been reduce to its current bearish leaning 70% net short as the S&P has pulled back to 1341. (Editors Note: Curt finished the day Wednesday at approximately 50% net short.)

My longer term view remains negative as I see no reason to change my opinions regarding the market's reliance upon the "Hopium" drug as it continues in a state of denial regarding the global economic outlook.

As evidence I submit the following regarding Wall Street earnings estimates:

• Back in August of 2011 Wall Street analysts were expecting 2Q12 earnings for the S&P500 to grow by about 11% as they foresaw nothing but sunshine and blue skies in the future.
  
• Now those same analysts are estimating that 2Q12 earnings for the S&P500 will decline, posting a roughly -2% result.
  
• Even as they have gradually and grudgingly reduced their expectations for the 2nd quarter of 2012 these geniuses still expect 4th quarter S&P500 earnings to expand by about 14%.

In my opinion the current situation seems eerily similar to that which existed in 2007. At that time, numerous luminaries including no less than Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson assured us that…

• There was no real estate bubble.
  
• That sub-prime mortgages were a minor and contained problem.
  
• That there were certainly no major problems looming in the U.S. (and global) financial systems.
  
• That the U.S. and global economies were not likely to see much reduction in economic growth and absolutely in no way were we on the verge of the worst economic contraction (The Great Recession) since the 1930's.

I can clearly remember how few there were who tried to warn of approaching troubles. Very few wanted to hear that the world of 2-week house flipping really wasn't likely to continue for very long. Nobody, especially realtors, welcomed cautionary statements regarding the likely inability to sustain a double-digit pace of home price gains. And yet back then I can remember telling folks that the situation in 2006-2007 as it related to housing reminded me quite a bit of the Dot.com Bubble from 1999. Back then nobody wanted to hear that it might just be unwise to invest in companies trading at 200, 500 or 1,000 times earnings. If they even had earnings, or sales, or a business plan. I can recall an IPO for a dot.com start-up that didn't have a product or service but that did intend to do "something" in the new internet world.

Does anyone out there besides me think that sounds familiar to a certain recent IPO which took place?

The common element shared by the market environments of 1999 and 2007 and today seems to me to be denial. Nobody wants to believe the party will come to an end. The punchbowl may be getting low but with everyone having such a good time all the party-goers hope somehow, someway it will be refilled so that the party can continue. Nobody enjoying the good-times wants to even consider the possibility that the party could be coming to an end. Regarding the markets and the economies of the world, deep down the feelings of many might echo the oft repeated line from Star Wars; "I've got a bad feeling about this". But we're all human and thus the natural reaction is to avoid unpleasant confrontation with reality.

Now I must tell you that I certainly could be wrong in my assessment of the market and economic outlooks. You will probably be shocked to hear that I have been less than perfectly accurate in the past. As to our current situation:

• Perhaps the European political leadership will come up with a solution which is painless.
  
• Perhaps all it will take is just one more really huge round of globally coordinated quantitative easing to get the world's economies growing rapidly again.
  
• Maybe 100's of years of history regarding debt and default as researched by Reinhart and Rogoff won't hold and this time really will be different.

But seriously, does anyone really believe that?

I’m Just asking.

Have a good one...

Curtis Bergquist
Manager – PRO Trader Service

Wondering what Curt’s next move will be? Take a Free Trial of The PRO Trader Today P.S. The PRO was well positioned for the recent correction and has gained +11.9% since April 1st while the S&P 500 lost -5.5%

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