Genie in a Bottle

Wow, that was easy. What else can I ask for and receive immediately? How bout a 6 handicap in my golf game? With one fell swoop (or one high rise) the market has bounced back above a few key technical levels (1040ish on the S&P and 10000 on the Dow) and sparked thoughts of 2nd half rallies that would put us around the 1200-1250 range still predicted by the likes of GS, JPM and the other smartest people in the room.

And while rallies and runs will occur, I do think its wise to take profits when possible. The macro-environment still lends itself to a market that will trade in a certain range (relatively sideways), with more of a downside bias if it has to choose between bull or bear. The reasons are the same as 6 months or a year ago, and that's a good reason we're still around the same level in the market as well.

(1) Housing == Seriously, this was simply a HUGE impact on the economy during the past 7 years. The most direct result is seen in the loss of construction jobs which continues to exist (in spite of a now 6 month old recovery). Another direct result is in the number of mortgage delinquincies and foreclosures. This was briefly interrupted due to government stimulus but has now resumed its negative path - showing how consumer we're in over their heads and using longterm investments as short term credit cards/equity. Extended impacts are seen in bank profits, wall street profits, and consumer discretionary stores -- all of which were third party beneficiaries to this creation of extra/imaginary wealth.

The process of deleveraging at the corporate level is over. It's been passed to the government. And at the individual level its slowly occurring as the most leveraged consumers are not paying their mortgages but instead putting that money toward living expenses and/or discretionary items.

Simply put, these are jobs and wealth creations that are not coming back until the deleveraging is done. And that won't be done for awhile. It's a positive natural cleansing of the system but it takes time. It takes time to sell 14 months of housing inventory when a healthy market would only have 7 months of inventory. You can't have open credit and fuel free market growth fully until the conduits of that growth are healthy - until losses are endured, debt is paid down and savings are adequately stockpiled.

It'll happen but it's going to be awhile. And while we're waiting, keep an eye on European banking and Chinese slowdown measures. Both stories have a ways to go before they are fully unwound as well. Mix it all together and you get one choppy market with a downside bias. Great for short term traders. Lousy for a Dow that hit 10,000 in 1999 and is still there in 2010. And arguably irrelevant for those who prioritize becoming debt free (not including an 80% mortgage on a house) in order to dettach themselves (to a limited but healthy degree) from a pure dependency on such a manipulable system.