The following premium content was originally published on the PRO Trader Service on Tuesday, 14-Aug at 8:57 am

Recently we have seen mixed, but I would submit, generally negative economic data. The U.S. retail sales figures for the month of July were quite positive but let's not forget that they followed a revised -0.7% decline for June (originally -0.5%) and a rather rarely seen 3 consecutive monthly declines for April through June. Some bounce back was to be expected.

The European economy, which comprises slightly more than one-fourth of the entire global GDP, continues to slide further into recession. Unemployment rates are extremely high, so much so that civil unrest is a very real concern for some EU member states.

China continues to slow with officials attempting to achieve a "soft landing" rather than a hard one. With the unreliability of official Chinese economic reports, a significant and growing number of economists, analysts and money managers believe that China's economy may already be contracting. In the mean time, Japan has recently flashed warning signs regarding its economic outlook. And then there's Brazil, whose GDP growth projections have just been cut again. Its economy is now projected to grow only 1.8%, sharply down from the 7.5% growth seen just 2 years ago.

Lastly, we have the United States economy. It has unquestionably seen growth slow to a crawl. Expectations for economic growth for the 3rd and 4th quarter have continued to be ratcheted downward. Highly regarded firms such as ECRI have warned of a recession. Earnings estimates for the S&P 500 for 2012 have been falling all year.

Yet the U.S. market, which has been generally stalled since April but more recently (since early June) has rallied, refuses to accommodate us "bears". There seem to be 3 reasons:

• Hopium - the expectation of more quantitative easing which even if such does not help the economy is widely expected to drive risk asset prices higher.
  
• Discounting and/or denial - the market is a discounting mechanism which is normally far more concerned with what the future holds than it is about the present. Currently, the market seems to be combining a state of denial regarding the global economy and the effects of a global recession ("Decoupling") with a desire to believe that central bank actions will "make it all better" and thus it is discounting better times ahead.
  
• Fund Flows - as Europe's economies deteriorate further and as the Sovereign Debt Crisis threatens to get much worse, capital is doing what it always does: migrating to more attractive locations. For now this is likely only a small movement and thus could be a modest part of the reason that the U.S. debt and equity markets have been so resilient. In the coming months (I hope not years) this may become a bigger factor.

It is my opinion that our current situation parallels quite closely that which unfolded during 2006-2007. I believe that, like then, this will end very badly. But also like then the actions of politicians and central banks, combined with the hopeful expectations of investors and traders can delay the day of reckoning for some time. The dot.com bubble eventually did burst but shorting dot.com stocks in early 1999 led to disaster. Some now highly regarded hedge fund managers made or significantly enhanced their reputations by betting against the housing bubble in 2006-2007. But they were not immediately correct and they suffered through some very trying times before the markets collapsed.

Those experiences are why I will continue to lean bearishly but will also work with smaller positions for the time being. I will back my opinions with my money but I also have learned the value of capital preservation.

I strongly hold the opinions I form and believe that situations will unfold as I expect. I, like many others in this game, have a big ego. However, hard won experience has taught me that precise timing is not usually achievable. Thus modest positions with a large cash reserve are the best approach at times such as these.

One must still be "alive" in this game in order to shout from the roof top: "I was right!"

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 +11.5% since April 1st while the S&P 500 lost -2.5%

 

 

Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and