Market Discounts, But Nothing Happened Yet

Wednesday, May 26, 2010

Nice hypothetical conversion between a head trader and junior trading with the jt justifying his substantially large short positions in global equities over at The Big Picture:
HT: Uh, huh. Tell me all the reasons why you are so bearish.

jt: Well, ever since the EU rescue package announced two weeks ago started to unravel, it looks like a number of governments might default and the euro currency could soon be history. Asia is also a mess, since North Korea might just start a shooting war with South Korea, and the U.S. might get into a trade war with China if the yuan doesn’t appreciate. Here at home, a slowdown in Europe could cause us to experience a double-dip recession, the appreciating dollar is going to hurt profit margins for our large, export-driven companies, and the Senate’s bank reform legislation looks like it might just crush our financial sector. Furthermore, the tape trades like death and all the momentum indicators are pointing south. Day after day, it seems like stocks are down 2% or more, and every rally keeps failing. Credit spreads are widening and the VIX is above the danger zone between 30 & 40. Being short isn’t just smart — it’s easy!

HT: And so you are short stocks, long puts, and short index futures — in size, right?

jt: Yes, sir, and just listing all the reasons why makes me want to press my positions even more.

HT: I’m sure it does. Now cover at least half of every position you hold — today.

jt; Cover! But why would I want to –

HT: Stop. Things might play out the way you think, but answer me the following questions: First, has any country in Europe actually defaulted?

jt: No, but…

HT: Has any country — voluntarily or involuntarily — left the euro currency?

jt: No, but…

HT: Has either North Korea or South Korea crossed the DMZ to attack the other?

jt: No, but…

HT: Has an actual trade war been started with China?

jt: No, but…

HT: Has the U.S. fallen back into recession, or have large companies started to report losses, or has bank reform legislation even reached the President’s desk?

jt: Not yet, sir, but…

HT: You’re right when you say the tape trades poorly, and stocks have indeed fallen and volatility has indeed risen, but don’t you think the momentum that is now your friend could turn on you in a New York minute?

jt: Yes, sir, but…
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