Friday, August 29, 2008

an economic surprise?

the rest of the world needs the US consumer as a source of demand.

growth in the rest of the world has kept fuel prices high, hurting the consumer

what if death of us consumer deprives the rest of world of mkt

what if they slow , pushing oil lower

at same time, USA cos get a lagging strong wave of exports

at same time, people keep working hard to somehow find a way to pay bills.

this boosts production and income in USA

it could be another wierd feedback loop...

there is leverage in EM off usa consumer... we are the driver, they are the high-beta economic off shoot

the recent strong economic data makes me ask this.



I wrote email the evening of aug 27 .. I think it raises some key issues:

I am starting to feel a little more bullish about stocks. I think if this hurricane doesn't do much damage and the world doesn't end in russia, we might see a big rally after labor day. there is so much cash on the sidelines and some important trends are occurring in certain key industries.home builder stocks have hit a double bottom and have more room to bounce.the dollar may continue to rally. small cap still looks good. the russell 2000 is consilidating above its 200dma.right now, there is huge pessimism, short interest, and cash on sidelines. all of that can snap back and drive stocks higher. also, the homebuilders and the dollar are both rebounding from very long-term selloffs. they can rally a lot before stopping.as a bear, I worry about russia because I think that as long as we avoid nuclear war, it will be bullish. what I mean is that if it gets resolved or at least temporarily goes away, that will drive buyers into the market. I don't want to make decisions based on something as random as russia. but here I think the likely short term effect is either nonexistent or bullish. those are many potential things that could spring back into the bear's face, like evergreen branches in the new hampshire forest. the shorts will cover ... cash will come off the sidelines, and this market could make a move higher.I am not sure about the probability of this scenario. but I am seeing some potential lines of causation that could matter.on the bear side, I see few likely factors that can come into the market. we're already discounting an awful lot of bad news.

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