"Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine. I've been fearful of this.
So far, what we're seeing is the pain in the financial system. Later on, we'll see the echo effect of the pain in the real economy. I can't understand economists talking about no recession or mild recession. This is the worst financial crisis since the 1930s. It's different than the '30s, but is the worst since then, and the consequences will be very, very painful for virtually everybody in our economies."
-Felix Zulauf in Barrons this week
Famed investor Felix Zulauf said it best this weekend in Barrons. Even if we can stem the financial crisis the real economy is going to adjust to a new world where leverage is reduced. Periods of adjustment are not good for markets as markets hate uncertainty.
The markets have been distorted by the new short selling rules and the new bailout plan. The short term is very uncertain as the rules of the game have changed. Indicators are useless as market players are in a state of confusion. I don't know where this will lead shorter term but I know where I think we are heading longer term.
My plan is to use any strength in the markets from the new bailout plans to establish short positions. I will give the market some room to rally because we did have a strong washout and that typically leads to rallies. However, above S&P 1300 I will start aggresively shorting the market. During earnings season in October I believe that it will be revealed that this crisis is not contained to financial companies but is spreading to the broader economy.