The market can stay irrational longer than you can stay solvent.
–John Maynard Keynes (1883 – 1946)
Yesterday, I received the following question: "Why aren’t you short yet?"
The short answer is, "No manager can afford to be too early on the short side. You can be long and wrong; you can even afford to be in cash and wrong; but short and wrong is fatal."
The more complete answer is simply this: The markets have been banking on a soft landing; As the recent economic data points have shown, this is an increasingly unlikely outcome. Consioder the following:
Durable Goods Orders: A key barometer of business CapEx equipment spending – decreased by 0.5% in August. Durables were downwardly revised to 2.7% in July. This confirms prior reports indicating slowing growth in the manufacturing sector. ISM index slipped 54.5, in August from 54.7 in July. The Philly Fed reported a -0.4 reading of its business conditions index. Economists had expected 15.0;
Mortgage Apps Despite rates sliding to multi month lows, mortgage apps were soft.
New Homes Sales: We looked at the New Home Sales data last year,
and found them unreliable — they are based on statements from
Builders; A more accurate basis is to use a moving average, and to
ignore wild swings beyond the margin of error.
Existing Homes Sales: Existing home sales, at 6 X the size of the new home sales, continue to slide as sales units slow, inventories rise and prices fall.
Consumer Revolving Debt: As HELOCs and Mortgage refis fade, we see revolving credit increase. That’s right, the US consumer has maintained their consumption by taking on more debt;
Business CapEx Spending: See Durable Goods
The market’s short term technicals do support the run for the highs; We have an excessive short interest, as well as generally gloomy sentiment readings.
But that peak is unlikely to be very sustainable.
Durable-Goods Orders Declined Unexpectedly in August by 0.5%
WSJ, September 27, 2006 9:16 a.m.