030707 Winners’ curse: time for bears to take profit?
Fundamentally, bears (equity shorts and yen longs, for simplicity) argues that US economy is going into recession dragged down by the leveraged housing market and consumers, and US equity bubble partially financed by yen-carry trade is going to deflate; Bulls (equity longs and yen shorts, for simplicity) argue that US economy is still in a goldilocks case, and the fundamentals behind yen-carry trade remain intact: the deflation threat to Japanese economy and the interest rate differential.
So who is “right”, only time can tell, ex post.
For now, it’s all technical.
Just like bulls before the correction, bears are now over-stretched, in terms of huge profit in one pocket, and huge margin balance in other.
Bears are just smart as bulls, and they know that before the final outcome comes out, economy is going to be in a mixed bag for a while, as described by Fed’s beige book today. So, in short-term, like the coming Friday’s payroll report, what is the statistical chance of hitting another home run for bears with a big “bang” coming out of economic data pipe? Bears got that big bang on Feb 27, 2007, with unexpected week Durable Goods Orders numbers, and
Is a chance of hitting another home run in such a short time frame worth the money to buy Yen up and to short equities down farther than current price level? That would cost a lot of money. How about staying put and doing noting? There you face the risk of your profit getting eaten up quickly if a reversal (particularly technical one) comes, and reversal often comes in an unexpected time and manner, just like the recent correction.
Which way bears would go? We all have to guess.
Today, bulls had a triple try of firing above yesterday’s high of Dow 12225, and got pushed back by bears at closing, down 15 points.
