Bull Vs Bear: Part 1 The Bear Case

The intention of this two part post is to step away from the day to day and explore both the bull and bear case through the end of the year. In the first part I will explore the bear case.
  • The heightened potential for an economic accident- Economic accidents tend to happen when the economy is slowing and their are plenty of imbalances out there to cause an accident.
  • IPO and secondary pipeline is quite full- Petrobras wants to do a greater than $30 billion secondary offering, while GM is looking to do an IPO of at least $15 billion. The government still has over $10 billion of Citigroup shares to sell. The IPO pipeline is quite full with private equity companies looking to bring back the LBOs of the past bull market like Toys "R" Us and and HCA. 
  • Record low cash levels at mutual funds- Since July cash levels have fallen to record low levels at mutual funds. It seems that mutual funds have been meeting withdrawals with cash.Cash levels are so low that further withdrawals will almost certainly need to be met by selling stock. Even if mutual funds have inflows they might use it to shore up their cash positions rather than buy stock.
  • Hardship withdrawals- Municipalities have been neglecting contributing to pension funds. As a result pension funds are dipping into assets in order to meet obligations. Additionally, I believe a large part of the recent withdrawals from the market have been due to people dipping into savings. With a weak job market that is set to continue.
  • The 99ers are running out of benefits-Unemployment benefits have been extended to 99 weeks. Even so 3 million people are expected to use up their 99 weeks between now and January. This will be an additional headwind for the economy.
  • Political risks-Republicans and democrats are so far apart on how to help the economy that it will be difficult to get additional stimulus if it is needed. There is the potential for the expiration of the Bush tax cuts which would not help psychology.

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