Tuesday, November 13, 2012

Pairs Trade: Short Fiscal Cliff/Long Recession

From Acting Man:

If It Were A Security You'd have to Short It …

The so-called 'fiscal cliff' receives an amount of attention that is completely out of proportion with the likely importance of the issue – which we would estimate to reside somewhere between slim to none. Does anyone seriously believe the US government's deficit spending will somehow magically cease to be anything but gargantuan?
See, that one was really simple. 
Yesterday a friend sent us a few recent Google trend charts. One of them confirms loud an clear that the 'fiscal cliff' is a short sale at this time, metaphorically speaking.

The 'fiscal cliff' via Google trends…it cannot go higher than where it now is. Ergo, it is a short – click for better resolution.

Go Long 'Recession' Instead

There are a number of reasons why one might consider going long 'recession', although the major recession indicators are not yet in 'red alert' mode. For the moment, they still indicate that the economy is muddling on…albeit with its imbalances growing, quietly and rarely remarked upon, below the serene surface.  However, on the Google trend chart it looks like a buy actually:

'Recession' has just turned up, but at 22 it is still a bargain. Nice rounding bottom. We hereby upgrade it to 'speculative buy' – click for better resolution.

There are a few market-based reasons for considering going long recession here. One is , as John Hussman reminds us (even after the recent swoon in the stock market, or rather, because of it actually), that stocks remain at dangerous levels. Quoth Hussman:
In mid-September, our estimates of prospective market return/risk dropped to the lowest figure we’ve observed in a century of market history (see Low Water Mark). That week turned out to be the high of the recent bull market, though it’s certainly too early to establish whether that was the ultimate peak. During the recent correction, I’ve noted a modest improvement in our return/risk estimates – which focus on a blended horizon looking out from 2-weeks to about 18-months. However, last week, the stock market experienced some significant damage to internals (breadth, leadership, price/volume measures, etc). As a result, our estimates of prospective return/risk have plunged lower again, to what is now the second most negative figure we’ve observed in a century of data – the September 14, 2012 weekly close of 1465.77 continues to mark the most negative estimate.“
(emphasis added)
Since we are not aware of an imminent asteroid strike or some such calamity, what could possibly bring this teflon-like miracle levitating on 'QE' fumes down? A recession sort of suggests itself as a possibility....MORE