Il Palio

Like the Running of the Bulls in Pamplona, one of the great spectacles posterity has yielded modernity (that continues in time-honored, though slightly more commercial fashion) is the Palio of Siena. Exciting, potentially rewarding, but nonetheless defying what you and I might consider good common sense, participants attempt to cheat death and oblivion for fame and fortune.

Irrespective of whether Goldman's Hatzius was talking his firm's book to manufacture profit in some Macchiavelli-inspired impact trade, the bounce in the complex of "Liquidity Sensitives" has been mean indeed, predicated almost universally upon the emerging consensus that the fed will shower the another 50bps of ease upon the leveraged and forlorn of the street coupled with a belief that US real estate woes are over, given two high-profile hopefully market-clearing deals by opportunistic hedged funds. Indeed, there have been bargains around as the retail, REIT, and financial sectors have been slaughtered. And despite my sympathy with Dr Roubini's concern for potential systemic meltdown scenarios, such possibilities remain on the margins, albeit more probable than 12 months ago. But volumes appear lighter on the bounces than those that might signal secular trend continuation, and this suggests to me that for the liquidity-sensitives, this remains a bear-bounce, albeit a white-knuckled one for highly-liquidated longs and highly-shorted shorts alike (at least in the US market).

It is such frenzied covering and reversal-swings that cause me to think of the Palio, for it is as once, both exciting and dangerous for participants and spectators alike. Just don't fall off, (or be in the path of a participant that loses equilibrium).

With specs and shorts fighting for offers in the same oversold names, I can't help but wonder what might ensue IF, once-given their 50bps, the market doesn't react in textbook fashion, instead resuming its more primary path of discounting the darker deflationary swings of the pendulum associated with a median consumer that has, in a word, been cluster-FUBAR'ed.