“Mark-to-fantasy” anticipation gives us a fantasy rally

I’m heavy short here and probably about to get the pinata treatment for a few days or a thousand Dow points…whichever comes first.  So, it’s important to note here that I’m “talking my book”.

But let me tell you why, ultimately, I’m comfortable being short at these levels.

First of all, it’s got something to do with the big run up we have had being overdone…but that’s a relative term so another 10% on a “big” runup is easy to see.  I’m often early on my most correct calls.

But what makes me most comfortable that this market will see huge huge drops is the lame nature of the reasons to rally.  I’m not going to list them all here, but approximately 99% of them have something to do with the Federal Government changing some type of rule or introducing some type of new printing press scheme.

I have yet to see a “we expect 2010 earnings to be good (much less stellar)” note that causes a rally.

It’s all “smoke and mirrors”, and tomorrow’s change in accounting rules (which I believe the market has already priced in significantly) is the icing on the cake.

Allowing the most irresponsible firms in the world to “mark-to-fantasy” instead of to market, we may see an uptick in Q1 forecasts (and subsequent stock prices, briefly), but with that will come a huge cost of uncertainty.  Are these numbers real?  How do I price mark-to-fantasy?  When is the other shoe going to drop?

These types of uncertainties are a GIVEN when the underlying cause of initial “confidence” is merely a change in the rules or intervention from an outside (highly leveraged and indebted) party.

And they lead to massive selloffs when the tide of sentiment turns.

Until we see banks buying banks without government backstops, or RAISING dividends, or a complete flush-out, uncertainty WILL REMAIN.  And it WILL keep buyers on the sidelines just when the market needs them most…on a downturn.

At least, that’s my take….and my money is where my blog is.

p.s.  Oil is your DEMAND indicator.  Factor out currency fluctuations….but keep an eye on it.  You’ll know if “recovery” is real by the way oil and its derivatives 6 months out are trading.  Right now, it’s saying “nothin’ doin”