Am I a Perma-Bear? And Also, a Typical Example of What I Call Too Much Complacency

Part 1 — Am I a Perma-Bear?

I've been bearish for a long time. Actually, I started this blog because early in the year 2007, when I first starting to think about the collapse of the equity markets, I couldn't find much information about my case, and couldn't find many bears around.

Some will say that I am a perma-bear, and that I have been too bearish for too long. Tiho, over at The Short Side Of Long exemplifies that, as he's been very vocal in the comments and private email conversations about that.

Reading my blog, I can easily understand them, because I have not really posted about the times when I got long equities or commodities. The reason is simple, those trades I made were short term, some just a few hours, some a few months, but they didn't change the overall picture that I envision: a long bear market that will deflate most assets by about 80-90% from their peak, during the course of 5-15 years.

I will give a short list of the longs I opened in late 2008 and early 2009 to give an idea of what I did during those times:

• GLD: bought below $80 and sold above $115 too early.
• SLV: bought between $13 and $9 (many transactions, during the decline) sold too early... 
• PGH: bought between $8 and $6 (many transactions, during the decline) sold between $8 and $12
• AAV: bought between $4 and $2 (many transactions, during the decline) sold between $6 and $10
• HTE: got acquired a few months later with a premium of 45%... 
• PWE: bought between $11 and $8 (many transactions, during the decline) sold above $15 
• NXG: bought at $0.55 (single transaction) sold at $3.00 just a few months later
• TCK: bought between $8 and $4 (many transactions, during the decline) sold a few months later for a reasonable gain, but which looks extremely ridiculous since they went up all the to $60!! The main reason is that on one of their quarterly releases, the stock opened lower -20% hitting my stop order, before closing up that same day at +20%. Sad sad sad. This is one of the biggest missed opportunities I've ever had.

My biggest mistake was that I sold too early and that I underestimated how crazy and greedy market participants would be: by the end of 2009, most of my longs except SLV and GLD were closed.

More recently, during the decline in August 2011, I closed many of my shorts and long put options, and also sold short many put options, which resulted in a synthetic long position on the market, giving me easily 70 to 100% gains, in a mater of hours or just a few days. I don't discuss these positions as: they are very short term sometimes really a few hours and won't bring anything to my readers and also, I don't won't people to start shorting options and take huge risks when they don't know what they are doing.

Part 2 — Capitulation?

Complacency and  I have been talking about complacency and lack of capitulation in the markets — and again, some will say that I cannot see the evidences, such as what Strategists are showing: 

• The USA Today consensus showed that strategists have cut their year-end S&P 500 targets by 8%.
• Wall Street economists are at 40% recession odds, which means if the heads of research allowed them to really say what the probability was it would be 80%.
• Bank of America let its chief equity strategist go who was calling for 1,450
• on the S&P 500 and the most bullish seer out there (we wish him well).
• The AAII investor sentiment survey shows 30.2% bulls and 40.3% bears.
• The Investors Intelligence survey also did a switcheroo, with the bull camp in the past week down 3.2 percentage points to 35.5% and the bear share rising the same amount to 40.9%. That is the largest number of bears since March 2009 (was 21.5% at the July market peak). And we have the fewest bulls since the August 2010 retest of the lows back then. The "spread" is now -5.4% between the bulls and bears, well off the +28% gap at the July market peak.
• Short interest on the NYSE and Nasdaq surged nearly 4% in the second half of August; these positions are now being squeezed, which is the "buying" support" the market has been experiencing in the low-volume rally of the past few sessions.

Part 3 — Complacency?


I have been mentioning several times in the past few weeks that complacency is very high. Well, let me elaborate once more on this.

First, complacency can be seen as something relative. If the economy is booming and the market is trading close to their multi-year high, and a 2% decline makes the put call ratio drop a lot and strategists to revise their estimates, then it is a bullish sign for sure.

Now, if the economy has been in a  depression for 3 years, unemployment extremely high, sovereigns on the verge of default, yet, a 15% decline is seen as a buying opportunity and the put call ratio is just reverting to the mean instead of skewing massively toward fear, and if the strategists are still seeing the markets up by 10-15 by year end, then, in relative terms, there is complacency.

And the CNBC video below is an extremely good example of what I mean by that: we are terrified, but we are 100% (or more!) invested in stocks. You cannot judge people by what they say, but how they act. And with the current markets, everybody is still very much fully invested.

Here's a quote from the transcript:

i'm an optimist at heart, maybe i'm too worried. tell me i am. i'm a it terrified optimist, larry, and i think it's right to worry. there is huge problems. on the other hand, we peaked on april 29th. we had a vicious bear market.20%. we had a selling climax at 1100 on the s&p 500 index on august 8th. it was 8th. it was re-tested twice in the futures market. not in the spot market. and we have had a successive rally of higher highs and higher lows. we're fully invested. we think the markets going higher and we think stocks are strategically cheap, end of the decade, we're over 2,000 on the s&p 500 index. and we have a gdp in the united states at the end of the decade of $20 trillion which will produce the profits to support it. all that is quite possible by the way. we have nyu economics professor richard coming on to tell us about a 2,000 s&p and 20,000 dow. dr. bob frolic, the last word, what would your specific investment strategy be right now? because i love what's going on outside the united states, larry, and we have to realize we have this weak dollar and probably with the high budget deficit, stays with us for a while, i like technology, i like materials, both of those sectors by the way, larry, they get a mar majority, revenue and profits from outside the united states. so it's a way to invest in this country but benefit from what's going on outside the united states. i think it would be a great strategy going forward. if i can make one other thing, the one thing that isn't concentrated in our market is earnings. mult. industries, multiple sectors, making money on the bottom line, making money on the top line. is that the best bullish sign you'll see. we just have to realize it. thank you very much, dr. bob, godspeed to you. david kotac, steven wise, thank you for coming on.