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June 29, 2011, 12:11 a.m. EDT
By Todd Harrison
NEW YORK (MarketWatch) "” I would like to start today's vibe by making a statement: I want to be bullish in here.
But I will follow that with an old-school axiom: Hope is not a viable investment vehicle.
We've dutifully weighed both sides of the market ride and last month offered that our trading compass pointed to S&P 500 /quotes/zigman/3870025 SPX +1.29% at 1,250 (and we got pretty close). Still, we'll chew through the macro dew one more time, for this is perhaps the most important juncture of the year"”if not, and I'm not prone to hyperbole, history.
Yes, history.
Bank of America is close to an $8.5 billion settlement with high-profile investors over claims related to mortgage-back securities purchased before the U.S. housing collapse.
The bulls will point to strong corporate credit markets (which suggest higher equity prices despite trading well off their best levels) and "The Misery Index," which recently hit a 28-year high, as a contrary indicator. They'll use technical terms like "stochastics" and "put/call ratios" to support their thesis, and in a vacuum they're 100% right.
Outside the vacuum, here in the world with the rest of us, we're dancing on the head of a pin, and few people seem to notice how precarious our position is. Way back when, during the panic of 2008, we spoke about the lesser of two evils, about how the government bought the cancer in an attempt to sell the car crash. See our Shock & Awe report from September 2008.
They were "successful," insofar that they jacked the stock market 100% and allowed Corporate America to roll its debt and issue stock. What they also did, perhaps unintentionally, is transfer risk from the private sector to an already burgeoning public sector, which has heightened tension across the geopolitical spectrum.
Again, there are two paths:
Drugs that mask the symptoms (throwing trillions of dollars at the problem), which triggered a spate of unintended consequences (such as outsized bank profits) and lead to a tricky trifecta of societal acrimony (over the likes of Goldman Sachs and BP), social unrest (from Greece to Libya), and geopolitical conflict (yet to be determined).
Medicine that cures the disease (debt destruction and reorganization) will be a bitter pill to swallow. But once we traverse that process, it'll pave the way to a legitimate outside-in globalization (the US won't lead, but will participate). This, in my view, is where the market was heading before the synthetic stimuli, and it's where the market will ultimately go whether we like it or not. The question, of course, is,"From where?"
I will say it again: I want to be bullish. As a small business owner, an American, and most importantly, as a father, I want to prosper and leave a better world for future generations.
The problem is, once you start down the path we're on"”once you begin to dig that hole"”there are only two options: reverse course or dig harder and deeper.
We've done the latter, and folks around the world have started to wake-up to reality.
Will Greece trigger the comeuppance? I'll be the first to admit that it's a tad obvious"”remember, we flagged the sovereign sequel to the first phase of the financial crisis 16 months ago. But that doesn't make it inconsequential.
Indeed, one could argue that a conditioned complacency has evolved, as everyone thinks the guy with the bigger pockets will save the day. See A Five-Step Guide to Contagion .
We're now faced with the specter of the biggest guys in Europe keeping their hands stuffed in those very same pockets, with their sweaty palms gripping whatever currency they have left. Every man for himself. Or a chain is only as strong as its weakest link, and when the going gets tough the tough take care of themselves.
There are a lot of ways to put lipstick on that pig, none of which are particularly pretty"”and none of which changes the fact that we're left with"¦a pig.
Here's the rub, and forgive the imagery of rubbed pork. In the coming days, you'll hear phrases like "voluntary" and "informal" with regard to proposed Greek solutions, and as much as your eyes would like to fast-forward through that vernacular, it's critical that you take the time to absorb the ramifications. As Minyanville posited last week, when it comes to the Greek standoff, semantics will most certainly matter. See Greek Debt Rollover: Why Semantics Matter .
If Greece is deemed a "credit event""”if it defaults (it owes roughly â?¬26 billion by the end of August), it will trigger a chain reaction not unlike what we saw with stateside financial institutions a few years ago. In this case, global investors will be much quicker to connect the dots from Greece to Germany to European banks to US financial institutions to ... BAM! Right here, with you and me.
So yes, I want to be bullish, but with a massively binary event in our immediate midst, I must defer to discipline over conviction, and that means no second-guessing regardless of how the market acts or reacts.
And I'll remind myself of a simple fact: The definition of a "crash" is when once-reliable indicators no longer work, and those who are staring at stochastic indicators and put/call ratios and Misery Indices would be wise to, at the very least, acknowledge that risk before they bank on a reward.
Good luck today.
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