What Would, Could, and Will Not Sink the Market

When I post here about the Economic Disconnect I try to point out conflicts between what the average person sees everyday with what they are told by talking heads on TV, read in magazines/newspapers, hear from government officials, and the general stock market. When I talk about the stock market, I mean the overall stock market (though the DOW tends to be the most recognizable by most). The post from yesterday titled "Moving the Goalposts for Goldilocks" was a perfect example of FED versus reality disconnect in regards to inflation. For full disclosure, I do trade stocks in a brokerage account, but its mainly smaller scale stuff. I stick to biotech (a snoozer for 3 years) and over the last 2 years I like metal stocks. I am no expert but adding to KGC holdings under $12 and PAAS under $25 has been an ok trade.
I, with all my vast expertise, will now reveal to any interested what Will, what Could, and what Will Not cause a major market downturn (by major, I mean 10% with no snap back rally in 1 week). Here it is:

What Will (may take a combination of two or three)

• The host of Economic Disconnect goes long the total market (that's a 20% correction)
• Existing home sales for 2008 after April are estimated at 3.0 million units (current estimate for next year is 5.78 million, and falling)
• The Dollar falls below the 70 level (its at 78.3 right now)
• Due to above dollar collapse, The FED hike rates to 8%
• Consumer spending drops by double digits % wise month to month (and no 5-9% won't do it)
• A major bank or brokerage fails (I mean BofA, Citi, Merril, the big ones.)

That's it. The disconnect has grown so deeply rooted only the above listed scenarios will tank the market.

What Could

• A slew of minor banks fail (something like the Miami Valley bank that failed)
• The FED not only does not cut rates this year, but raises 50bps by next March
• Every quarter for the next 4 quarters all the major banks have equal or larger write downs than we have seen so far
• Home prices are falling at a rate of greater than 10% nationally

This list, even if two or more happen, may not be able to bring the markets to their senses, but some money might be scared enough to pull out.

What Will Not

• Home sales (new and existing) continuing to fall at a steady rate (5-10% year over year even against a bad year this year)
• FED stays pat on rates
• Consumer spending is negative, but under a 5% decline comparably
• A major bank basically fails, but is propped up or "taken over" by another bank with the help of the FED
• The dollar anywhere over 70 on the index
• A major homebuilder goes under, or two, or three
• The host of this blog goes short the total market (that's a 25% pop to the upside)
• Unemployment rises to 5.3%

The what will not sink the market list is scary, but it will only succeed in causing serial "bottom callers" to harp on the worst is over line until the next data comes out, then that point is the bottom. If this list is occurring, talk of FED cutting will keep the market frothy and happy.

There is 3 lists that will be worth checking over time. My humble estimation of the 3 possibilities comes out like this for the next calendar year:

What Will = 10%

What Could = 10%

What Will Not = 80%

Sorry to disappoint any bears out there, but I figure we are looking at a dismal year for earnings, home prices, home sales, consumer sales, the dollar, employment, and inflation. And I do not think any of that will get in the way of Mr. Market. The current psychology is so out of touch, most are going to be buying all year so they do not miss the "bottom of the cycle" even though we are already priced for near top end of a cycle.

I think it will take into 2009 for reality to have crashed against the optimism for so long, that the market finally relents and starts down. I could be wrong of course, and I encourage any interested to leave comments. I will review and post on comments that add to the debate. Have at it.

And have a good night.