Here's a riddle for you: What is the most common question you hear posed from the talking heads during a sideways market? The answer, of course, is this: "Has the bottom been put in?"
After a gut-wrenching ride down to the likes of 6500 on the Dow, US markets rallied over the last several weeks and a gaggle of traders skimmed another few billion from the sheep. Now, with the rally encountering turbulence, everybody wants to know whether this is a pause in the bullish action or simply another oscillation in the sideways pattern.
My speculation is that we are likely still in the sideways pattern; and it is a speculation based on the continuing obstacles faced by the Obama economic team. Most flummoxed of all about these obstacles is the president himself. He is a problem solver and he seems quite perplexed by the continuing rain of bad news that keeps pummeling the White House roof. Perhaps that's why he is always jetting off in Air Force One to parts unknown. (Memo to Barack: Stay in the Oval Office until further notice—your charm wears thin.)
On the economy and the president, loyal readers will remember that during the campaign, my biggest beef with Obama was his lack of any macroeconomic training. Given that I teach this subject at a business school and given that I've seen thousands of really smart people pass through my classroom over the years who have a really hard time understanding this stuff, I don't have a lot of confidence that even someone who is as quick a study as Barack Obama will be able to master the intricacies of the macro economy anytime soon. That means that Obama will remain at the mercy of his team of advisers and while they are all smart, none of them are as smart as they think they are or need to be.
The Princeton Guy
Let's start with Federal Reserve Chairman Ben Bernanke—the Princeton guy. Loyal readers will also remember that when he got appointed, I predicted, quite presciently as it would turn out, that Helicopter Ben would wind up to be the biggest fall guy in history for Alan Greenspan. What I failed to anticipate is just how bad Bernanke would be in his own right. I just figured that here was a smart guy who would be left with an impossible situation; but at least he would figure out the best way out of that bad situation. Never did I imagine that Bernanke would make the situation so much worse.
Not only did the Princeton guy help create the massive housing bubble with his easy money policies. He has now set the stage for the most comprehensive debasing of our currency the United States has ever witnessed. The even bigger problem with the debasing of our currency is it's "beggar thy neighbor" nature.
Every time that Bernanke cuts interest rates on their way down to near zero and NOW every time the "quantitative easing" Bernanke increases the money supply further, the dollar falls further. The story does not end here.
Because China manipulates its currency, the Chinese yuan falls with the Bernanke buck.
Essentially, that's a beggar thy neighbor screw job from the US and China for everybody else in the world trying to get out of their economic woes. Whether it be Europe or South Korea or Japan, a falling dollar and yuan makes it that much harder for these other regions and countries to export.
Meanwhile, as I tried to explain to Larry Kudlow (unsuccessfully) several weeks ago on CNBC, the cheapening dollar drives oil prices back up to strangle the economy.
This is insanity. Where is Paul Volcker when you need him?
The Harvard Guy
Now what about the Harvard guy—Larry Summers? I was getting my PhD at Harvard during the 1980s when the young wunderkind Larry was regularly walking on the Charles River, even when the Charles wasn't iced over. The word you always here to describe Summers is "brilliant." Sure, he's smart. But he now is doing the job even a village idiot could do after you gave that idiot a few hours of training in Keynesian economics. Plus, every time the guy gets on a news show and starts talking about the economy, everybody watching feels worse.
This is the kind of guy the president needs to lock up in an office and feed once a day and let him write his daily memos for staff. He should not be put in charge of anything. He should not be put in front of any TV cameras. He should not be allowed to brief anybody because he simply is an intellectual bully who overwhelms people with the power of an intellect which, as powerful it is, is simply not up to the job.
Now how about our Treasury Department Secretary Tim Geitner. Riddle me this Batman. Why do I think of Captain Queeg every time I see Geitner on the tube? Wait, I have just insulted Captain Queeg because even Queeg seemed more relaxed than Geitner.
To be fair to the man, Geitner has an impossible task and it is a task made all the more impossible by the fact that most of the key staffing posts at the Treasury Department remain unfilled. That, by the way, is the president's fault—not Geitner's.
My bottom line here is that throwing a few trillion dollars at the economic crisis is not leadership. It's desperation. The financial markets smell that desperation; that accounts for the downside pressures in the sideways market pattern. At the same time, with all the money washing into the system, the financial markets also sense at least a short term opportunity. That accounts for the upside pressures on the sideways market pattern.
How that plays out in the markets is the proverbial crapshoot. My approach now to trading this market is to keep a lot of my ammunition in cash. Meanwhile, I've begun to build a few positions that I think have some upside potential.
For example, I bought GE at eight dollars, sold it for a little over $10, and then rolled over my profits into some January 2010 calls with a $12.50 strike price. In the worst-case scenario, I lose the house money. At the same time, I bought a bunch of 2011 calls for Citi with a $5 strike price. I like this trade because the calls were cheap, the downside risk has been defined, and the upside is enormous if Citi takes off.
Bottom Line: This continues to be a short-term trader's market right now. Be like Jack—nimble and quick.