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[Tor]

That is the question. Alan publicly stating that there is big chance of recession will get the insurance puts working overtime. We live in an asset based society now. Housing market moderating may attract money into stocks. Stocks falling while housing also falls, leaves no hiding place against deflation, and I would guess this is to be avoided at all costs? Views sought. For now however I reamin bearish.

[gm_general]

Here is what Bob Carver had to say: Saturday, March 10, 2007 Market Shrugs Off Hedge Fund Blues Last Week The stock market's brief dip of two weeks ago has shown that, technically and fundamentally both, the market is in great shape. And, as far as sentiment is concerned, the crowd is pouring almost all its money into puts, insurance against further downside. This three-legged stool of fundamentals, technicals and sentiment has more than enough support to keep the uptrend in the stock market alive. Fundamentally, the S&P 500 Index is estimated to have a year-end PE Ratio of 14.57, which is very low with long term interest rates below 5%, as they are now. The faster-growing S&P 400 MidCap Index is estimated to have a PE ratio of 16.68 by year-end (source: S&P Corporation). Most bears look at the S&P 500 Index and point to the fact that it's basically been trading in a range this whole decade. However, that's only half (or less) of the story. For one thing, most other measures of the broad market -- and even the stodgy old Dow Industrials -- long ago soared well past their old high-water marks. Moreover, although the S&P 500 Index at 1402 is well below its 2000 peak of 1553, including dividends in the index puts it at 4708 at the end of February. Dividends, which represents a real return to shareholders, actually subtract from the value of the nominal index and distort the true return from it. Technically, the selloff in late February came with little sign of weakness. There were no breadth divergences at all, which usually mark an important top. In this respect it was very similar to the May selloff last year -- and we know how quickly the market recovered from that one. The dip was a buying opportunity in an ongoing uptrend, exactly the kind of opportunity the savvy investor is always looking for. That's why we were quick to jump in and we've been rewarded (that doesn't preclude a retest of the lows, which is entirely possible and cosistent with last year's correction). Finally, sentiment provides the third leg for the stool. Index option traders are falling all over themselves to buy put protection. As we move toward options expiration this Friday, those expensive puts are rapidly plummeting toward zero. As the price falls, the writers of those puts, who sold stock index futures short as a hedge against the short puts they created, are buying back those stock index futures and levitating the market. Now, once the puts are bought back, that levitation pressure will ease. We might very well get another dip and another opportunity to buy on the cheap. The only real fly in the ointment is the role hedge funds have played in the correction. When they engage in outrageous speculation with the Yen-carry trade, they are putting the entire economy at risk of a financial meltdown analogous to Chernobyl. The leverage which caused the Crash of 1929 and subsequent Depression is small potatoes compared to the leverage employed by these funds, who borrow Yen in Japan and use it to invest in non-Yen assets, in process selling the Yen short. When the Yen rallies, they lose money and have to repurchase Yen to cover their margin calls. This forces them to liquidate markets they have profits in -- and which fundamentals say are not overvalued -- putting tremendous selling pressure on them and roiling the markets. That 400-point down day in the Dow was simply a mechanical sell program which threw the babies out with the bath water so that hedge funds could cover their losing currency gamble. Had the Yen continued to rise last week instead of fall, we might have seen the Dow continue down. Imagine waking up in the morning to find that the Dow was down 3000 points. It could happen and there's not a thing the regulators are doing to prevent it. This lack of regulation of "Hedge Funds Gone Wild" is setting the system up for a huge crash. And, don't think it's only the rich who will get hurt -- the hedge funds' biggest customers are pension funds. Yes, that's right, if you have a pension fund, it may very well be invested in an over-leveraged hedge fund. Of course, if we do have a financial meltdown, the regulators will all testify they couldn't see it coming. They always say that. And, they said they couldn't have foreseen hijackers flying airliners into the World Trade Center, either. If you believe that, we have a bridge we'd like to sell you. The real problem here isn't just the fact that too much leverage is being used. If it were confined to the currency arena, it would be contained. The problem here is that when a large hedge fund gets overextended and is losing billions, it is forced into non-related markets, like commodities, stocks and bonds, and a fire sale takes place, reducing the value of those markets to a degree far greater than any actual losses that hedge fund might be facing. That's because the pricing of all assets is entirely dependent upon the last sale price, no matter what the size of the transaction -- that's a law of the markets. This shock to the financial system ripples throughout, causing non-related parties to suffer huge losses, additional liquidation in unrelated markets, and so on, until the ultimate integrity of the system is compromised. These are the "fingers of instability" that John Mauldin is always warning about. And, it could certainly happen. Picking up the pieces after such a meltdown is far worse than preventing the problem before it happens. In any case, historical market action has shown that the very best time to buy into the stock market is at the bottom of a crash. Even at the bottom of the 1929 Crash, the market gained over 46% during the next six months before turning down again. This just points up the fact that buying crashes and using a trailing sell stop is the best strategy of all for long term investors -- and beats buy-and-hold by a country mile.