The Worst Is Not Over

New York rallied 17% last week. Black Friday sales came in much stronger than expected (perhaps this is rocket science after all). Greed is setting in on the street, what if there is a boom back now and we miss it? So people jump in. A lot of funds also have cash available from bond sales, and would not mind making a killing on stocks towards the end of the year.
But, this is not a great reversal. This is a sucker’s bear market rally.
One has to understand the dynamics. The peak was August-October 2007. Then there was a chopping off of the top of the market, the irrational exuberance. That’s the 50% down we have seen. Right now there is capital depletion, most businesses have a capital base – and as they do not make the necessary changes they deplete their capital. It will take some time for the capital to be gone, they will eventually cur back heavily or go bankrupt or both. So the suffering in the real economy will be slow and painful. The stock market will reflect this, slowly and painfully. The stock market might turn around 6-12 months before the real economy eventually turns around, but that is way into the future still.
We shorted Europe on Friday in expectation of weak Black Friday sales, but covered our short when the DOW turned positive shortly after open. Covering was a good move as the market kept going up, 1.17%. Black Friday sales came in much better than expected, but it turns out the discounts offered were larger than ever, 50% not uncommon. This, dear reader, is also phony – it is capital depletion, the shops and chains are selling stuff at a loss – in order to make the sale look successful, depleting their capital. Peeing in their pants.

When is the time to short it then? This can hardly be spotted with any kind of accuracy, but one thing is certain – the further it rises the more safe the shorting gets. Look for continued climbs today, while sharpening your sword.

We do not generally recommend the kind of short-term short selling we ourselves did on Friday. But we spotted a clear bet that we acted on, and once it went the other way we closed it with a small loss, fair enough. For our recommended portfolio see the Farmann portfolio section, we have not changed it since October 12.

The Farmann forum is picking up well, some really interesting discussions going on there. Do join in,

We did some future scenarios this weekend, the results will be coming up here later. Early warning: interest rates might stay low a bit longer than expected.

We are also thinking hard about the eventual recovery, what will drive it, where will it come from, how to benefit? Will write more on that later.
Oslo, Norway. December 1. 2008. Hans Lysglimt

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