Patience finally pays

It has been a difficult few months, but it seems that my patience is finally paying off. I have been convinced that this credit crunch was not over. Everyone wanted it to be over in October -- risky assets were up, the Fed had eased, banks had taken the necessary write-downs, credit spreads were coming in -- but I was certain the crisis had much farther to go. The current problems in the credit markets will likely take years to work out. That is not to say that financial markets will remain in "crisis" for years, but the short panic in August just seemed too short, too small and too easy a payment given the size of this problem. Sub-prime is only one facet -- there has been a very large increase in household debt over the past 5-10 years, and the re-adjustment will have serious implications for the financial sector and the economy in general.

So my short positions are finally making some real money as the equity markets start to decline. I expect this will be a relatively severe bear market that could last 12-18 months, but it is tough to know. Right now the short-term direction is down. That is not to say the market will fall every day, or every week. Some days the market may rally significantly, and some weeks the market may gain. But overall, equities are headed lower. At this point I am going to leave my position alone. I may trim slightly if there is a particularly sharp fall, and I may add a bit if there is a particularly large rally, but overall I plan to keep the size roughly constant.

I continue to be bullish on gold, but in the short-term gold may fall further as investors reduce exposure to risky assets. This is a healthy correction in a long-term bull market. In fact, I have been waiting for this -- it is the reason that I did not add to my position earlier. So I will keep a close eye on the situation, and may add to the position on a sharp fall.

On agricultural equipment, I am still bullish, and view the recent correction in AG and CNH as returning the stocks to more reasonable levels. The sell-off is undoubtedly linked to the decline in the broader marker, and should not be construed as negative for the companies. I still plan to add these companies to the trading portfolio, but I will watch for either 1) a particularly sharp decline indicating the companies are oversold, or 2) strength in the stocks when the overall market is weak, indicating that the stocks have started to buck the broader trend. I need to try to avoid the temptation to buy too soon. Patience.

MARKET POSITION: EQUITIES - SHORT (6 units); GOLD - LONG (1 unit)