Uggh.

First off, I have been remiss in posting to this journal. The point is to document my thoughts and strategies so that they are clear and to ensure that I do not decieve myself. Doesn't work very well if I don't use it.

Second, performance stats for November.

I think the charts speak for themselves. It was a great month. Despite being a bull at the start of the month, I managed to be fairly agile and catch some of the big moves from both sides. I even nailed the bottom of SPX within a few points.

One major problem -- I closed out last Friday with a massive long equities position, then was very busy with the real job yesterday, and my portfolio got whacked by 14%. Uggh. What a day! My own fault, really. I knew the market was overextended and due for a drop (not like that, mind you), but I held on looking for a bit more. Poor risk management. My achilles heal.

So where to from here? As I mentioned, I am long equities (still), with a smallish cash position. My conviction level here is a bit weak, but I am still bullish. Yesterday's action smacked of panic. People went long last week (or did not sell) now clamouring to get out. The PMI and news of the official recession date provided good excuses to sell. We needed a correction to restore some doubt to the market. The optimists came out pretty strongly last week. Good bear market rallies should be choppy, volatile. Keeps everyone afraid and on the sidelines. Then they pile in when the market is higher.

So after yesterday's break I think that the optimists will hunker down some more. The media this morning is certainly really bad -- lots of stories about how long and deep the recession will be, how monetary policy is moving to quantitative easing, etc.

That is not to say that the news is not bad -- it certainly is. There is growing evidence that the credit crunch is not easing, and the longer it persists, the worse will be the impact on the economy. But the most likely assumption is that this is already priced into the market. The most likely path would seem to be up.

Now that the correction is out of the way, we should be clear for a rise into the mid 900s on SPX. But the market needs to rally hard today. If it does not, all bets are off -- a new low may be in the offing. For now, I am holding tight.

MARKET POSITION: EQUITIES - Long SPX, CDN equities, EAFE, golds, emerging markets; CURRENCIES: CDN/USD - long; Cash

October Performance

Portfolio performance to 7 November, monthly/6 month performance to 31 October. I will not say much about my performance in October, except to say that I am glad that I stuck with it. In the beginning of the month, I was almost ready to sell all my positions and take the month off. The volatility was very stressful. But it was worth it.

Last week was another stressful one. Massive rally on election day lifted my portfolio to a new high, then it was hit pretty hard by the sell off Wed/Thursday. I was so busy with my real job that I did not have time to follow the markets, therefore I did not reduce any positions, which would have been prudent at some junctures. Did not even have time to set some proper stop losses (I did not want to rush that, as I have screwed them up in the past).

At the end of the week, however, I am not too worried about my holdings. Yes, a lot of paper profits were wiped out, and that was poor risk management. But this market still looks like it is heading higher, and my portfolio is well positioned for that move.

A few of the reasons why I am still bullish: 1) the news is relentlessly downbeat. Everyone seems to know that the economy is going to be really bad in Q4 and through 2009. Even though the employment number on Friday was worse than 'consensus', it was better than the whisper number, and the market rallied. So few negative surprises left in the short-term. 2) The other financial markets did not really participate in the sell-off Wed/Thursday. Bonds, currencies, commodities all moved a bit in sympathy but far less than a 10% decline in the equity market would usually cause. 3) the 100 point decline in SPX was a nice 2/3 retracement of the 150 points it rallied in the previous week (if it falls below 900, then I would start to become more concerned).

So it seems, from my perspective, that the market just needed a big downward 'correction' to shake out the soft longs -- those that had jumped into the rally but did not have the stomach to hold on.

The market now should be better positioned for a slow grind higher. But this is still a trade. Not sure if I will hold this for a few weeks or months, but unlikely to be very long.

MARKET POSITIONS: EQUITIES: LONG CDN EQUITIES (3 units); ENERGY (3 units); SPX (5 units); EAFE (2 units); GOLD (2 units); CDN$ (2 units); CASH (1 unit)

Quick mid-week post

Quick mid-week post to update thoughts and trades. As I stated last weekend, I had become very bullish. The price action on Monday/Tuesday convinced me that we were building a base so I put most of the rest of my cash to work. On Monday purchased more SPX, and on Tuesday morning purchased more Cdn equities, gold equities and went long the C$. All of these looked very oversold and ready for a major bounce. The commodities downswing in particular was way overdone -- I had expected oil prices to fall to about $80, and they went to almost $60! In terms of the broader indices, there seemed to be about an even chance that SPX could fall by about 10% (to its 2002 low) or jump 20% higher. Those are pretty good odds that one does not see very often.

As it turned out, I was luckly in my timing, as the market exploded upwards late in the day Tuesday. Certainly did not expect that! And it made me a bit uncomfortable, as sustainable rallies generally do not happen like that -- they are slowish grinds upwards. When the SPX was up almost another 3% yesterday afternoon I was about to sell, but then the market collapsed in the last 15 minutes, so I held off. Ironically, the decline actually made me feel better, because it showed that there is a lot of nervousness out there, which is important for the rally to be sustainable.

All in all, it's been a good few days, and my portfolio is up another 9% since last Friday, and is up 34% since the end of September.

Market positions: EQUITIES: LONG CDN EQUITIES (3 units); ENERGY (3 units); SPX (5 units); EAFE (2 units); GOLD (2 units); CDN$ (2 units); CASH (1 unit)

Even more bullish

The past week in the markets has been a meatgrinder for investment portfolios. I think that most people probably lost money. I managed to eke out a small gain, thanks to my large short gold position. This was a great position and was very profitable and essentially bailed out my long equity index positions. But I am now completely out of it. Gold may fall further in the short run but a bounce is looking more likely and it's not worth the risk.

The price action in the equity indices on thursday/Friday was pretty bullish, by my reading. A crash was widely expected and it did not happen -- instead we bounced off the approximate lows of 2 weeks ago. I think a lot of people that were playing for the bounce are now out and scared. There is still talk of a crash.

It is difficult to remain bullish in this environment but I think that the large rally may finally start tomorrow. Sentiment is very negative. But if there was going to be a crash, it would have happened by now. Crashes are very unlikely when all the fast money is already positioned for it. Plus, the seasonal factors are against it. Most of the big crashes happened in Sept/early Oct. We already had 2 in that time frame. Anything more is wishful thinking on the bears' part.

What I would like to see is a slow, steady grind upwards -- climbing the wall of worry. The economic data is likely to remain very bad over the next few months and this will keep sentiment from becoming too positive too quickly.

But I still believe that this will only be a bear market rally. There will be lower lows at some point next year.

My new favourite position is long energy equities. With the collapse in oil prices over the past few weeks, these stocks are pretty beat up. But they formed a nice bottom last week, and now look like they could jump significantly higher in the short-run. I added to this position on Friday.

Market positions: EQUITIES: LONG CDN EQUITIES (2 units); ENERGY (3 units); US (3 units); EAFE (2 units); CASH (8 units)

A funny thing happened on the way to the crash...

...I became a bull. After about 18 months of being a bear, I became a bull. When SPX was about 1120 i.e. way before the crash that I had been waiting for, for so long (e.g. see http://cdn-trader.blogspot.com/2008/06/end-is-nigh.html). Ironic? Yes. Annoying? Slightly. But, in fact, it has not been so bad. My account has performed well regardless (up another 17% this week). And the reality is that, just as there is no bell rung at the top of the market, there is no bell rung at the bottom either. The returns following shortly after the bottom of the market can be large, but, once it becomes obvious that the bottom is 'in', it is too late. One needs to take a controlled amount of risk and put some capital on the line. The key is practising good risk management. Mine has been OK, certainly better than it used to be, but far from perfect. Something to continue working on.

A quick review of trades over the past week. The HUGE rally on Monday scared me, it was too big a rally for a bull market -- it was more of a bear market rally. My initial reaction on Tuesday morning was to sell all my long positions, and I started to do that, selling my entire Japanese equities position, but then I got a case of the 'what ifs', as in, "what if the market keeps going up and I sold everything" -- regret, greed, etc -- and sold half of everything else. Of course, in retrospect Tuesday morning was the greatest time to sell and go short, and it almost appears obvious, but it was not at the time.

I debated re-entering the long positions Wednesday and again early Thursday, but it was not until late Thursday, when I saw the successful 'test' of last Friday's lows with a strong rally following, that I re-entered most positions (did not do Japan, though).

I am not an experienced chartist and do not know the names of patterns, but what we saw this week must constitute a pretty bullish pattern. A massive crash on Wednesday (one of the largest in history) followed by early move lower Thursday, subsequent rally, and a small loss Friday.

I think we are setting up for a nice rally over the next few weeks. Sentiment is pretty negative. Last week was really scary, and I bet that a lot of people who still had some money and 'cajones' jumped into the market on Monday / early Tuesday, and were then burned on Wednesday / Thursday. Those people were reminded that bottom-calling is not easy. A lot of people were probably thinking of buying and have since drawn back. They are in 'wait and see' mode. A a lot of people are expecting the market to resume its downward slide next week, but it has now been 5 sessions since the most recent bottom. The slide is probably over for now.

Some other supporting factors: VIX was over 70! for several days. EUR/JPY has been at panic levels but has not made new lows. Also, the 2-year note yield has not hit new lows, suggesting that the fixed income market is not expecting more interest rate cuts. In fact, the longer end of the yield curve was hit, causing the yield curve to steepen considerably. A lot of people have suggested that this is because the market is worried about the large amount of supply from all the extra debt that the US Treasury is going to have to issue. But I think the real reason is that the market is starting to discount a normalisation of economic conditions. A steep yield curve will also help the banks strengthen their balance sheets. The policy response from governments around the world has been overwhelming the past week, and it appears that they finally "get it". They will do whatever it takes to protect the financial system. Finally, there are tentative signs that the money markets are starting to work again. In fact, we could see LIBOR decline very quickly in the near future as people realise that the global financial system is NOT going to implode, and the interbank markets re-start.

One of my best positions, however, is my short gold equities position, which is up about 50%, and constitutes a significant chunk of my portfolio (over 25%). I still love this position. Gold has fallen back to near its most recent low, and I think it will collapse over the near future as people realise that the crisis is over and inflation is not coming back for a while. Even with the recent panic buying (and media stories about shortages of gold coins), gold never got near $1000/oz. Most other commodities have collapsed. This sucker is going down!

I am long energy equities. Oil came down to $70/b, even lower than my expectations ($80), and energy equities have collapsed. This is a short-term play -- I am looking for a sharp bounce. HEU came down from $30 to under 5$. Looking at the chart, and the fact that $75 oil is still a pretty good price, HEU at $15 is not out of the question.

On my long index positions, I think that the indices may rally for a few weeks, maybe longer. There is a strong possibility of a re-test of the recent lows in the next few months. I will have to decide at that time how to play it (whether to hold on or try to time it). But I think we could see a nice rally after that for 3-6 months. But this economy is pretty sick, and stocks are still not cheap. Eventually we will probably break the recent lows. It will be important not to get caught up in the hype. Once it becomes accepted wisdom that the market is going to be fine -- it will be time to go short again.

MARKET POSITION: EQUITIES: LONG ENERGY (1 unit); LONG S&P/TSX (1.5 units); SHORT GOLD (3 units); LONG EAFE (2 units); LONG SPX (3 units); CASH (3 units)

Good times, bad times

Portfolio performance (1st chart to 10 October, next two charts to 30 September).



After checking the potfolio returned less in September than I initially estimated -- 24.2%. Pretty good performance and I am happy with it. What really annoys me is that, after being short equities for 13 months, I closed my positions and went long at the end of September, right before the major indices dropped by another 25% or so. It is bad enough to leave that sort of money on the table, it is REALLY annoying to lose money when the collapse that I have been expecting for so long finally happened.

Two mistakes were made, both of them made before: insufficient patience and poor risk management. I should have waited longer for the downtrend to continue, and I should have closed my long position immediately after it became obvious that the decline was continuing. Stop losses are very important in volatile times, especially when one cannot follow the market closely.

That all said, I feel very optimistic now that the market is very close to a bottom, and there are some great returns to be made on the long side. I closed out my long positions early last Wednesday, avoiding some of the worst drop. I then tried going long Thursday morning but quickly closed the position when it became apparent that the market was not going to rally. Then bought HXU and SSO pretty aggressively near the close on Thursday. Added long Japan (EWJ), long EAFE (EFA), long energy (HED) on Friday morning (NY time).

The main rationales for the purchases are as follows: markets have fallen way too far too fast -- a bounce is due; there was an immense amount of panic in the markets (see VIX), the bad economic and financial news is widely known and expected; I strongly feel that while there may be a bad recession, there is not going to be a depression; a number of historical technical indicators had been reached; very few bottom callers around, the politicians are finally taking some real action on the banks, the panic in the equity markets did not seem to be mirrored in the FX and fixed income markets -- although the fixed income markets were bad, the slide was not on the same scale.

As the market sold off throughout the day, I felt a bit sick at first, but I soon realised that I felt very strongly in the position, so I am comfortable holding this even if indices go another 5% lower (more than that and I might get worried).

So we shall see what the week brings. My base case scenario is that the markets bebound for 4-6 weeks before falling again and re-testing the current lows. We then might have a sustained rally for 4-6 months.

I should mention that I also have a significant short gold equities position. This is baed on 3 factors: 1) the steepness of the increase in gold equities recently, 2) gold was well bid over the past week due to the chaos in the financial markets, but it never came close to its previous high, 3) industrial metals prices have been plummeting as the economy weakens and concerns about deflation return. What can I say? Overdone.

MARKET POSITION: EQUITIES: LONG ENERGY (1 unit); LONG S&P/TSX (1.5 units); SHORT GOLD (2 units); LONG JAPAN (2 units); LONG EAFE (2 units); LONG SPX (3 units); CASH (1 unit)

Yikes!

A quick look backwards before considering the future: portfolio performance in September was excellent. Unfortunately, I do not have precise figures now (so the charts will wait), but I estimate the one-month return was 37.6%. The portfolio is now comfortably above my long-term performance objectives.

Quick thoughts on today's market: I purchased the EAFE ishares (EFA - non-leveraged) when they were at $54 - down almost 4% on the day and SPX was down about 2.5%. I was wanting to broaden my long equities exposure to the rest of the world -- did not feel right being long only US & Canada, especially when EAFE markets have declined so much. At the time, seemed like a good opportunity to pick up some more long exposure at a reasonable price.

The markets sold off pretty heavily into NY close, with SPX down 4%, S&P/TSX down almost 7% and the Transports off 8%. A major blow-out. Economic data was bad today, and it seems to have finally dawned on people that the economy is in a major recession, and it's not ending soon. Plus the interbank/money markets/fixed income markets are badly damaged. Despite the passage of quarter-end yesterday, spreads are extremely high, companies are paying heavily to borrow (when they can), and banks are forcibly deleveraging.

The big question is: Are we sitting on the edge of a complete meltdown? Or is this dislocation now priced into equities? I will admit that the situation looks very bad. Perhaps the worst since the Great Depression (as many others have said). But I am inclined to believe that we are at a short-term bottom. First, my market 'fear metrics' are at very high levels: EUR/JPY, the VIX and 2 YR US Note are all showing extremely high levels of fear. Second, equity markets are down a LOT already over the past 3 months. History would suggest that a bounce is in order. This is confirmed by the failure of SPX and DJIA to make new lows today. We have finally seen the popular tech names (AAPL, GOOG and RIMM) break down.

Although I am rather uncomfortable with my long equities positions, history has shown me that it is often the times that I am most uncomfortable that the portfolio performs well. Comfort is gained from going along with the masses, which is usually a bad strategy. A meltdown is impossible to rule out, but is the low probability outcome. But risk management is very important, of course. And for that reason I have not made large bets -- cash levels are still high, and the new position is non-leveraged.

BTW, I am kicking myself for not increasing my short gold position, which I seriously considered adding to a few days ago. It is up about 30% since then.

MARKET POSITION: I still have not got around to accurately re-calculating my positions yet, but it should be close to: EQUITIES: Long Cdn S&P/TSX (2 units); long SPX (2 units); long EAFE (2 units); short gold sector (1 unit); CASH: (5 units)

FINALLY!

The day that I have been waiting for, for so long, finally came today. The big downside wash-out, that has been eluding the markets for over 1 year, arrived. I will not go into major details as I am very short on time. Even more important than the markets -- my son was born this morning. I am extremely grateful that he and his mother are both healthy and happy.

I closed out ALL of my short positions except for my short gold equties position. I sold the short EAFE position very early and then the rest in the last hour as the indices slipped. I made huge profits on the short energy position. We did not exactly get to my 1100 target on SPX but it was close enough. And close is good enough in these situations.

Gold rallied today as fear was very high, but all other commodities have collapsed, and I think it is just a matter of time before it falls. It is now very 'overbought' and deflation fears are rising.

Some one (or some people) managed to forced SPX down 20 points in the last few minutes of trading. Will be interesting to see what happens tomorrow. I see two options: 1) the market open sharply lower but then rallies through the day, closing much higher; 2) the market opens sharply higher, then falls, but today's lows hold. I would be VERY surprised to see the market close lower tomorrow.

For that reason, I went long S&P/TSX and SPX indices near the close today. Even if I am wrong about tomorrow, today was a major day of fear. It's unlikely to last. I see the markets rallying for the next month or two, maybe even longer. In the short-run, the time to be aggressively short is past.

MARKET POSITION: I Have not been able to accurately re-calculate my positions yet, but it should be close to: EQUITIES: Long Cdn S&P/TSX (2 units); long SPX (2 units); short gold sector (1 unit); CASH: (7 units)

Short energy and gold

(I am late with this post -- I made the trades several days ago.) As I mentioned in my last post, I am negative on energy after the quick snapback in oil prices last week. On Monday I purchased some HED, which I sold a couple of weeks ago at over $20, at a little over $16. There still seems to be a lot of long-term bullishness about energy prices, despite the rapidly slowing global economy. Oil prices over the past few days have been stable but it feels like they are struggling to keep their head up. I except that once the $100 level is breched again we could see oil fall to $80 or even $75.

After much humming and hawing, I decided to go short gold equities too a few days ago. The chart is rather compelling -- the jump up to $900 from $780 marked a rough 65% retracement of the previous decline from $1000. With growing evidence of a global slowdown and no sign that deleveraging is going to halt anytime soon, the short-term fundamentals for gold are also negative. On the other side are risks that gold could jump higher again if the crisis deteriorates much more, plus, with all the money and government spending that is being thrown at this crisis, inflation is bound to become a serious problem in the long-run. But who knows when that might be. In the end, I decided that the short-term factors won out. I think the big OMG moment for gold was last week, and now it will decline again, probably below the $780 low.

On the broader markets, I am starting to get nervous again. As expected, a large proportion of the big rally last week reversed on Monday and Tuesday. Yesterday stocks surged higher on hopes that a bailout plan would be released, despite terrible economic news and a profit warning from GE. I still expect that SPX will go lower before it goes higher, but I am losing confidence in my long-standing prediction of a bottom in 1000-1100 range. There is not a lot of time left -- the bottom should happen in the next couple of weeks (if you look at bear market lows in history, most of them have been in September or October). So I will probably lighten up my shorts again on any sharp declines, and may even look at going long. But it is foolhardy to try and pick the exact bottom.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3 units); short real estate (2 units); short energy (2 units); short gold (2 units); CASH (1 units)

What a week

Wow, that was a crazy week. Equity markets plunged, snapped back, and in the end had slight gains. Fixed income and currency markets were somewhat similar, as were many commodities. My portfolio ended the week with a 3.7% gain, which is not bad given the volatility. At Wednesday close I was up about 12%, but most of that evaporated in the massive rebound on Thursday and Friday. Looking back on the week, I was both unlucky and lucky (let's face it, luck is an important component of short-term returns). On Wednesday evening I closed out my long gold equities position for a nice 25% one day return. Gold looked like a nice buy on Tuesday, but I had no idea it was going to spike like it did. I also closed my short EAFE (EFU) position near the high.

On Friday, I had bad luck. I wanted to re-enter my short EAFE equities position. My first quote on EFU was about 108.50, and after 15 mins of system problems with my broker, I was finally filled at about 113.50. This is about $20 less than I sold the same position for earlier in the week, but it also turned out to be the high for the day, as the price slowly slid to about $105. The result was even more annoying as I broke one of my rules -- do not trade in the first hour after the markets open. Sometimes lessons have to be re-learned.

Overall, however, I amhappy with how my portfolio performed, and I am happy with my positioning for next week. Apparently, Thursday/Friday's rally wasw the biggest gain in the DJIA since October 1929, in the middle of the great crash (in 1929, the market subsequently sold off another 25% or so). Classic bear market rally. Although the bulls are back in the limelight, after that sort of rally, I do not see the markets gaining again this week. The technicals are also still bearish. SPX bounced nicely off its previous support at 1260. MACD is still negative. The only two sectors up this week were the two that were most oversold previously -- energy and financials. Despite the massive gains on Thursday/Friday, neither day had >90% of stocks up. Volume was not great.

The fundamentals also remain the same. Sure, we are not going to have a financial meltdown now, but that was never priced into the markets. The economy is just as bad as it was last week, and the government/Fed bailout is not going to have much impact at all in the short-term.

To be clear, I am not predicting a crash, and we may not see a break of last week's lows. But the market is almost certainly going to go lower again before it moves higher.

I am generally happy with my positioning. I -may- re-enter my short energy equities position Monday as the stocks have rallied considerably over the past few days. But, at this point, I do not feel particularly strongly about anything else.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3 units); short real estate (2 units); cash (5 units)

Not as fun as it should be

This gradual collapse in the markets is not as fun as it should be. It is what I have been predicting for months. Yet now that it is happening, I am finding it stressful. Portfolio performance continues to be very good -- it is probably up about 10% over last week. Yet as I am still holding many positions, and the market is very volatile, it is too early to consider these gains as permanent.

After yesterday's swoon, the market opened today rather weak and I liquidated my short energy equities position at a good price. Oil got close to 90$/barrel, which was my target price, and the ETF spiked up through its previous high. Later in the day, I purchased the gold equities ETF HGU (again). There were a few reasons for the purchase: 1) it had fallen significantly from the price I was stopped out a couple of weeks ago. The chart was also good -- a bottom last week followed by strong gains, and it did not get near its previous lows yesterday as the broader market sold-off. 2) The same reason I bought this ETF last month -- risk management. I was worried that the FEd might goose equities again by cutting interest rates, and I wanted a position that would act as a partial hedge for my index shorts. At close the position is uip about 5% from my purchase price, so it has helped in that regard.

Of course, the big remaining question is: when to cover my index shorts? I have been holding on to these positions for what seems like forever (some more than a year), waiting for the market to finally reach my target price range (1000-1100 on SPX). The window is getting smaller -- seasonally, the market tends to bottom in Sept/Oct and then rally into the new year. After today's rally, I am slightly worried that the market may not get to my range this year. On the other hand, today is only one day, and based on the preliminary advance/decline stats, it was a rather narrow rally. Yesterday we had a large, broad drop through previous support. In this case, the technicals are unclear. And there is little value in fundamentals when the market is primarily driven by sentiment.

The best option is probably to gradually reduce shorts on weakness when possible, with a view to having them all closed within the next month or so.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); long gold (1 units); short real estate (2 units); cash (3 units)

The trend is your friend

A lot has happened since I last posted. The weakness in global financial markets that was just beginning at the end of August has spread. The main stress indicators have increased: EUR/JPY now around 151, 2 year US treasuries at 2.2. The CP discount rate is still in the 80 bps range. VIX has increased to about 25 but that is still not signalling severe pain in the equity markets. Clearly there is still some more downward moves ahead. As I mentioned in June/July, I am looking for somewhere around 1000-1100 on SPX as a near-term bottom. That should set-up a nice rally over 3-6 months.

My portfolio has performed very well since end-August, with nice gains coming from EAFE weakness (EFU) and the weakness in commodity prices has finally pushed down the S&P/TSX. Falling energy prices gave a shot in the arm to my short energy equities position (HED), which is up about 60-70% from my first purchase. On that, $100/barrel oil keeps getting mentioned as a 'line in the sand' that should not be crossed. There are still some energy bulls out there, although the numbers are dwindling. I like situations like that. Once the line is crossed, it should lead to a strong, final drop as the last of the weak longs capitulate. I plan to cover at that point, although if I see some good prices early I might liquidiate half the position.

I mentioned in my last post that I wanted out of the long gold equities position. Unfortunately, I did not sell HGU at 17.25 in this portfolio a couple of weeks back due to a technological problem. I decided to wait for the bounce, and eventually got stopped out last week at 14.25 The price is currently 10.60, so I am happy at being stopped out, but annoyed that I gave up a nice profit and ended up with a $1.30/share loss. This was always intended to be a short-term trade. I learned that such trades need to be managed very closely and acted on quickly.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units); cash (2 units)

Performance Aug 2008

Performance in August was good. It was my third consecutive month of positive returns. I am trying to improve the consistency of my performance instead of always shooting for the moon. Moon shooting is great when it works out, but it can be nasty if you are wrong. My little bit of risk management earlier in the month helped out, as the TSX and gold both rose after that point. I am looking to off-load the gold on any strength. I was going to do it mid-week but, alas, I was not able to trade so missed the opportunity. So far the bounce has been tepid, but I expect at least a minor surge before it turns lower again.

As for the broader markets, they have been pretty directionless, as any look at a chart shows. The conditions seem to be building for another leg downwards. Sentiment had a boost with the revised US Q2 GDP numbers on Thursday. There seems to be a growing sense that the US may have dodged the recession bullet. Meanwhile, European and Asian data has been pretty bad, threatening the exports that have kept the US afloat. Mortgage rates are still high due to the problems at FNM and FRE, which should prevent the housing market from recovering quickly.

Some of my favourite indicators are starting to suggest an increase in financial stress. EUR/JPY is below 160, US 2 year treasury yields have fallen by 23 bps in the past month, and the CP discount rate has ticket up a bit. VIX is still low at about 20, however, indicating that the pressure has yet to have too much impact on equity markets (although european and asian indices were weakish this week).

From a psychological standpoint, the market may need to move sharply higher in the near term in order to increase the bulls confidence and shake out the weak bears. This would set-up a sharp decline over a few week period to much lower lows. This is a low conviction prediction, but if the market DOES move much higher over the near term I may increase short positions.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units) ; long gold (2 units)

Hedging some bets

Last week was a good one. Despite the fact that SPX rose fairly strongly, and I have a strong bearish bias in my positions, my portfolio rose in value, reaching its highest point since early March. With this in mind, and with SPX moving higher again in early trading today, I thought it might be a good idea to hedge some bets. The primary reason for my good performance the past few weeks has been the fall in energy and commodity stocks (I am short both the S&P/TSX index, which is heavily weighted towards commodity plays, and the S&P/TSX energy index).

Looking around for a cheap hedge, gold stocks seemed like a good candidate. The price of gold has fallen by about $150 over the past month or so, and gold stocks have been crushed. HGU, the Canadian ETF that tracks gold stocks, has declined by almost 50% since July 14. I previously owned HGU earlier this year, but sold my positions at levels about 50% higher than here (which was tough at the time, as it then went up about 25%, but I feel vindicated now). Although I am usually wary of trying to "catch a falling knife", a small gold position seems like a good way to offset some of the risk that my short S&P/TSX and energy positions might turn around after strong runs. Enhanced risk management is also part of my new strategy. I reduced S&P/TSX to partially fund the purchase, raising a bit of cash in the process.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units) ; long gold (2 units)

Summer Doldrums

After my best month yet (June), I managed to follow-up with second positive month, making 2 consecutive positive months for the first time. This fact, plus that my portfolio is barely even 12 months after starting this journal may indicate that risk management has not played as strong a role as it should have (although many have done much worse, I suppose). So I plan to try to have a greater emphasis on risk management this year. This will mean more stop losses to ditch losing trades, more closing out of positions when the risk-adjusted return wanes, a greater attempt to find trades where some of the risk is offset, and higher cash holdings in times of uncertainty.

Economic news last week continued to be poor, though not terrible. Internationally, there is growing fear of recession in the UK, some smaller eurozone countries and Japan, and the economies of Germany, Canada, Australia and India appear to be slowing. Even the Chinese are now more worried about growth than inflation. In the US, the initial unemployment claims hit almost 450k, a level consistent with a recession. Q2 GDP numbers were lower than expected and Q4-07 was revised to negative. ISM came in at 50, though the forward-looking components were weak. The employment report was viewed as positive because jobs declined by 'only' 50k or so. The Baltic Dry index is down.

On to the markets: bond yields are rangebound, though down from their peak several weeks ago. Nothing really interesting in the FX markets. Commercial paper spreads remain wide, as is LIBOR. Mortgage rates are about the same as they were 12 months ago before the credit crisis even started and the Fed funds rate was much higher (not good for the housing market). Commodities prices are weak. Oil is $20 off its highs, as are many industrial metals.

The rally in equities may have petered out. There was a failed attempt by SPX to break above the 1290ish mark set 2 weeks ago. This is negative as bear market rallies need to maintain momentum, otherwise they die. I took a quick look at most of the rallies following sharp declines over the past 5 years or so (using SPX). I did not see one where the rally stalled for longer than 5-6 days. Pull-backs were always very short. There is nothing scientific in this, but it suggests that we may not be seeing 1325 anytime soon as many pundits are suggesting. Many people see April-May as the model for the current rally -- a gradual move higher over 2 months or so. The market rarely repeats itself so cleanly.

I continue to believe that we will see a major market bottom in the near future, either this month or early next. This may be followed by a brief rally and a re-test of the lows, and then a sustainable rally for a considerable period. One can then assess whether the global economy is out of the woods, or if their is scope for further declines. As there have not been any changes in my strategy, there have been no changes to my portfolio.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units)

Waiting again

After some excitement last week, it is back to waiting again. Waiting for the markets to finally collapse. Last Tuesday there was a brief moment when it looked like it might happen, but then the markets pulled back from the brink and rallied fairly hard the next 2 days. Despite my concern that a bounce was near, I elected not to cover my shorts. I had set a few indicators that I wanted to see before I covered (sharp falls in 2 yr note yield and EUR/JPY, VIX above 32/33, SPX near 1100). And although all of them started to move in the right direction on Tuesday, they were never close to what I was looking for. This shows that there was relatively little panic amongst institutional investors, suggesting that the bottom is yet to come. I mentioned a few weeks ago that I thought the bottom would come in August or September, I am going to stick with that for now.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units)

Strange

More of the same in equities today: open higher, grind lower through the day, and another new low at the close. What I find strange is how little volatility there was (relatively speaking). With the Indymac and GSE announcements, I expected either a strong rally or a collapse. Difficult to see this trend going on for much longer -- it seems that everyone is bearish (especially on financials). Either there needs to be a bounce to clear the oversold condition, or there needs to be a collapse to bring valuations to a more reasonable level.

Although I am increasingly uncomfortable with my short index position, I am not going to cover unless there are either some signs of capitulation or valuations get to a more reasonable level (say, below 1100 on SPX). I also took advantage of the strength in energy equities today to add one unit to my short energy position. As mentioned before, it seems that the price of oil is now squeezing the global economy so badly that demand is suffering, so the price should decline soon. However, if it does go higher still, the position is well hedged against my short index positions, as an even higher oil price would put severe downward pressure on global equity markets.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (2 unit); short real estate (2 units)

Classic Bear Market

Equities have been in a classic bear market the past 6-8 weeks. Sometimes jumping higher, investors constantly waiting for a bounce, but prices gradually moving down, down, down. It is amazing that SPX is down about 200 points from its recent peak and still there have not been any days with drops of 3% or more. On the contrary, whenever the market does drop a lot intra-day, it usually recovers some or all of the drop by the close, just to keep people in the game. There have also been lots of the classic bear market pattern of higher opens and lower closes.

Performance last week was good; portfolio gained 2.7% vs. losses of about 2% on both SPX and the S&P/TSX indices. However, the portfolio has still not re-gained its level before the March lows. Looking at some past trades, the decision to clear my long gold position my probably correct but clearly poorly timed -- gold shares have since rallied nicely. I am happy with the short energy position and may add to it on a pull-back. The short real estate position has finally recovered to close to the purchase price, and should do well from here.

Economic news was pretty light this week. Initial claims pulled back but the previous week was a holiday and the non-seasonally adjusted number was about 400k. The trade balance improved, which some people saw as a positive but is pretty negative from my perspective -- weak imports mean weak domestic demand and lower exports from the rest of the world. Consumer sentiment was more or less unchanged at very depressed levels. The decision by the regulators to close Indymac will certainly have repercussions for the US housing market, given that the company was the 3rd largest mortgage company in the country.

In other parts of the world, the BOE remained on hold despite an economy that appears to be on the verge of recession. Note that sterling and euro yield curves are very slightly inverted at the 1Y/10Y levels, indicating a high probability of recession. China export growth is decelerating, which should be no surprise given slowing demand in the major developed economies. The Japanese economy has also been producing some weak figures, but I think that the return of -inflation there should mean higher asset prices over the medium-term (a good trade to consider after global equity prices fall a bit more).

I have been short equities for a while now, and my faith that the market was always going down did not waver much -- until now. This is for a number of reasons: 1) Sentiment is starting to get pretty negative. It seems everyone and their dog is a bear now. The news on the economy is getting bad, and a recession is starting to become widely accepted (again). Those people who think the market may go up are only talking about a short-term bounce. 2) short interest is very high by historical standards (though this is not as objective a measure as it appears on the surface). 3) the market has been oversold for a while. In addition, there might be a post-Indymac bounce just as there was a post Bear bounce in March, plus there is the rumour of the Treasury injecting funds into Fannie and Freddie Monday morning that should alleviate concerns there for the short-term anyways.

On the flipside, there has still not been a real capitulation. No large down days in equities, JPY/EUR is strong at 169, and the 2-year US bill closed on Friday at 2.58, hardly indicating fear (although treasuries were supposedly weak due to concerns that the government would have to take on the GSE's liabilities -- these seems extreme). VIX has remained comfortably low, again closing well below 30 (although this signal's value may have declined significantly since everyone appears to be watching it to time a bottom -- e.g. Bloomberg story last week). Finally, valuations are still much too high. As I mentioned last week, SPX aggregate earnings are probably about $70 right now. Assume a typical market bottoming p/e of 12 or even 14 would put the index in the 840-980 range.



What is needed is a steep enough decline to bring valuations and expectations down and also knock oil off its pedastal. This would probably set-up a nice rally that could last for 3-6 months, if not longer. Although a bottom in August in September still seems the most likely scenario, there is the possibility of a major decline in the next few days given the recent events. I plan to watch the price action closely to try an anticipate if it is worth taking some money off the table, if only for a short period.


MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (1 unit); short real estate (2 units); CASH (1 unit)

Performance to 4 July 2008

Quick post. On performance, June was my best month so far, but this was off a terrible April/May, so does not account for much.

On the markets: equities globally are down, a lot in most cases. Many people are calling for a bounce here, based on three factors: the markets are very oversold, markets have touched a few important technical lines (e.g. the Jan/March lows on SPX), and general sentiment seems to be getting pretty bearish again as investors realise that the US probably has NOT escaped a recession.

I agree with all of these points, yet I still do not see the conditions necessary for a sustainable move upwards. For me, the most important indicators are those that point to a high level of concern or panic, and I do not see that yet. Vix is still in the mid-20s, the Yen is softish, there has yet to be a 3%+ down day nor a large downside gap at the open.

I remember the old trader's maxim: do not sell a stock just because it has gone up. I also remember that over the past 6 months, there has been many times that the market looked like it was very overbought, and then it went higher still. I also remember that in bear markets, the last few days/weeks can account for over half of the fall in prices.

The combination of factors weighing on this market are very strong: housing crash, credit crunch (which spreads indicate is still with us), a weakening economy (unemployment up 1.1 pp over the past year), and ridiculous oil prices ($140+ last week). And valuations are not reflecting this. The P/E on SPX is currently a little over 17. Given the poor earnings outlook + bouyant (if not rising) inflation, the p/e should probably be more like 14, if not 12. I remain short.

There has been no change in my positions but I have re-tooled the weightings to reflect changes in market valuations.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (1 unit); short real estate (2 units); CASH (1 unit)

Orderly slide

This recent slide in the equity markets has been perfect. Fairly steep, but orderly, gradual. No large gaps or sudden slides. I suspect this is because many participants are a bit shell-shocked. They thought that the economy avoided a recession, or they thought that it was going to be short and shallow, and therefore the bottom in the market was already in.

There is a large and growing bear contingent on the web, and this worries me a bit. But many of them were talking about a bounce last Friday, and it never came, so maybe they were as surprised as everyone else by the markets over the past 2 days.

I think that as long as the decline remains fairly orderly and VIX stays at reasonable levels (say, below 32/33), we could have an acceleration of the decline over the next few weeks. I am looking for about 1100 on SPX. And if concerns about global growth continue to rise, then commodities should fall, and the TSX could fall pretty hard and fast with them. I am going to watch VIX for a sign to cover, plus for a large downside gap on the open.

MARKET POSITION: SHORT EQUITIES (10 units); SHORT REAL ESTATE (3 units); SHORT ENERGY (1 unit)

Quick update

Equities have been trending downwards the past two weeks, and today we had the first really big down day in a while (almost 3% on SPX) and the Dow made a new low for the year. Credit spreads have jumped out, the TED spread has turned up again, USD is soft, gold spiked up and oil prices are hitting new highs. The big question, of course, is whether this represents a tradeable bottom, or at least are we near to one i.e. should I be covering my shorts?

Sentiment is getting pretty bearish. I hear a lot of talk about SPX re-testing the March lows. Short interest is high and rising. The economic news has continued to be bad, and I get the feeling that the consensus may swing towards a 2008 recession again. On the flip side are a number of other factors: VIX is still pretty low (23.9 today), treasuries are still well above their lows earlier this year -- and the curve is still pricing in a hike this year; stocks are not cheap, commodity prices are still very high (I expect these to break down before the market bottoms), EUR/JPY -- a great crisis indicator -- is high (167/168), and there are few people talking about a serious breakdown in the equity indices -- most are just talking about a re-test of March lows.

So unless we have a major breakdown over the next few days, I think I am going to stay put for now. In 2002, the market fell through June, and then SPX lost another 190 points in the first few weeks of July. Goes to show that when the market really collapses, it can move far. I think the real bottom will come in August or September. A large gap-down on the opening Monday might change my mind over the short-term, however.

Portfolio Performance

I am late posting May performance as I have been traveling the past few weeks. I will not say much here -- the charts speak for themselves. Disappointing. Returns have improved the past couple of weeks but have a long way to go to make up for the carnage in April and May.

The US markets have been pretty weak the past few weeks but Canada remains pretty strong. US economic data has been weaker than expected, for the most part, though it is still inconsistent. My base case is still that as concerns about global growth increase, commodity prices will weaken (gradually at first, then more quickly), and the TSX should also fall. Although there are a few holdouts, consensus seems to be that high commodity prices are here to stay. I never feel comfortable agreeing with the consensus (although this sometimes gets me into trouble).

Sentiment is interesting again. My greatest concern is short interest on the NYSE, which is at all-time highs. Hopefully this does not indicate a generally bearish disposition, as this would mean that the market is close to a bottom. However, other indicators suggest that the market is still not overly concerned. VIX is in the low 20s, many people still seem to think that the US has dodged a recession, and there is little panic talk. Price movements may have become short-term over-sold, but so far the action has been relatively calm, indicating that we are not at a panic bottom. However, if there are a large number of shorts out there, the market could rebound pretty quickly after a bottom is formed. We should get more confirmation this week with the FOMC meeting plus several key data releases.

I sold my remaining unit of gold last week on moderate strength. I took a loss on this position after haveing a sizeable gain at one point. I will not try and give a lesson right now, but needless to say, I see the downside as greater than the upside over the short-term.

MARKET POSITION: SHORT EQUITIES (10 units); SHORT REAL ESTATE (3 units); SHORT ENERGY (1 unit)

The end is nigh

I have a strong feeling that the end is nigh for equities. All equities. Let me be clear. I am not saying that equities will crash and never recover -- I am talking about a rather quick and messy slide that takes 15%-20%+ off of the major indices from current levels. It will probably also be a "V" shaped bottom, with a fairly quick bounce up from the lows. This is also not a prediction for the next week, but rather what I expect over the next 3 months.

My rationale is based mostly on current oil prices, which are having a severe impact on consumers and businesses in most countries at current levels. The liquidity cruch of 07/08 appears to have passed (the worse of it, anyways), but it has left economies weakened and vulnerable, and the big jump in oil prices is a kick in the head that will be impossible to dodge. The hawkish rhetoric coming out of some central banks does not help either. The UK and German yield curves are now inverted, pointing to recessions there within about 12 months. The US yield curve has also flattened as yields have risen -- definitively NOT what is needed to get the US economy and financial sector back in shape.

The slowing in global growth will inevitably impact commodities prices as everyone remembers about the laws of supply and demand. This will impact the TSE and many other indices that have been supported by commodity producers.

I would like to exit my remaining gold position at a decent price if possible -- unfortunately I missed the latest uptick but it is a relatively small position so I am not overly concerned. So far, the short energy position has worked well and I may add to that position in future. Other positions, such as short real estate and short EAFE equities, are also starting to do better. The one major loser in my portfolio is my short CDN equities position, though I feel comfortable with it given my comments above.

My fundamental analysis is supported by sentiment. As of last week the consensus was that the US had dodged a recession, but that is starting to change. This is now the best time to be short -- as the consensus slowly moves from one extreme to the other.

Bonds have been big losers over the past few months but I think the worst is past. Bonds yields also spiked up at about the same time last year, then dropped with equities in the summer/fall. I expect the same to happen again this year, as concerns about the economy return over the next month or so. However, I expect inflation to remain troublesome so it is very possible that the previous lows may hold.

MARKET POSITION: SHORT EQUITIES (10 units); SHORT REAL ESTATE (3 units); LONG GOLD (1 unit); SHORT ENERGY (1 unit)
Posted by CDN Trader

Couldn't resist

I could not resist shorting energy shares. After buying and then quickly selling HEU at about $18.00 only about 2 months ago, I was forced to watch it march to almost $30 today. I have been patiently watching oil prices and waiting for the right time to enter on the short side. I think that time is now. Sentiment has changed dramatically over the past couple of months. When oil was at $90, no one thought it would sustainably break $100. Now the media is full of reports about oil going to $150 or even $200, and there is less talk about speculation -- it's all about the long-term fundamentals. I believe in the long-term fundamentals. Oil may go to $150 or $200.....but not right now. Not with the global economy slowing. Not with the US consumer suffering with higher food and gas prices.

Of course, I am taking a gamble here. I am going against an established trend, which is generally not a good idea from a trading perspective. And prices can sometimes go vertical at the top. The problem is that when commodities turn, they can sometimes do so very quickly, especially when one side of a trade has become very popular. I am not a very fast trader, so sometimes I must be a bit early. I have taken a small position, and entered tight stops.

I funded the trade by selling one unit of HGU (gold). Gold has had a nice run over the last month, but I fear it too is getting near its top. A return to $1,000 is looking unlikely (in the short-run). I will probably look to exit my other gold position over the next 1-2 months, depending on price action.

MARKET POSITION: SHORT EQUITIES (10 units); SHORT REAL ESTATE (3 units); LONG GOLD (1 unit); SHORT ENERGY (1 unit)

Everyone's confused (me too)

There is a sense of confusion in the markets. You see it in the indices, and you read about it in blogs and in the media. There seems to be 3 distinct groups emerging. The first see the indices as very over-bought, the fundamentals are terrible, and therefore the markets must be heading down in the near future. The second group is the complete opposite, arguing that the trend is up, it is strong, the data has all been better than expected, and the markets are heading higher. The third group falls somewhere in the middle and may be the largest. It sees the markets as overbought and the data as poor. It sees that the markets are probably due for a short-term correction. But it also recognises that the uptrend has been pretty strong, and if anything, the technicals are starting to look better. It also recognises that there are still a lot of people on the sidelines, and these people may need to get sucked into buying before we see a real reversal. That would send equity indices another 3-5% higher (approx.).

I fall into the last group somewhere. I already went out on a limb and called a top and was wrong. I am not going to try that again. But the data this week continued to be on the weak side, despite the fact that the market thought it “better than expectations”. That may be true, but to me it just showed that the underlying economic momentum was strong so it is taking the economy a little longer to slide. In fact, this is not new. In past recessions, there was often a period of mild weakness before the recession really got underway. And I really do not see how the economy is going to have a mild downturn with a sharp recovery when house prices are crashing and oil is at $125.

So I continue to believe that the downside risk to equities is much, much greater than the upside potential, and therefore I am keeping my short position. There is some evidence that market sentiment is getting very bullish, which is probably necessary before we can have a sustained downturn in equity prices. But there are still a lot of bears out there, hanging in (like me). So I am not going to rule out a pop as some more cover their shorts.

Rangebound (again)

It seems that the equity markets are probably rangebound again as everyone awaits a bit more clarity on the economic picture. Data over the past few weeks has generally been better than expected, showing that expectations had been set pretty low. But now people are starting to talk as if there is no recession at all, or it will be very mild. The data do not support this conclusion, either. Employment (including initial claims), consumer confidence, housing starts and the ISM manufacturing index are all signalling a weak economy, one that is probably mildly contracting.

Looking forward, there are few good reasons for optimism. The consumer is suffering from the powerful one-two combination of falling house prices and very high gas prices. The financial crisis, which may or may not be over (I am somewhat ambivalent here), has had a severe impact on consumer and business confidence. Interest rates have been lowered significantly but the full impact has not been passed through to the end-users due to the problems in the financial sector (mortage rates remain above 5%) and loan officers are reporting a tightening of lending standards.

What is obvious is that there has been a major shift in investor perceptions since the March lows, and most are now much more bullish and trading the recovery. This is good from a contrarian perspective. I assume that the recent peak around 1420 on SPX will hold and we will ultimately see the index around 1150 (though I dislike hard predictions like that). Any strong gains above 1420 would be a serious concern and force me to re-evaluate my positioning.

HXD continues to be a major loser in the portfolio and is a strong argument for the introduction of a stop-loss rule (which I abandoned soon after trading). However, I am becoming much more bearish on commodities after recent spikes and therefore am more comfortable with the HXD position. In some ways, this is shaping up to be a classic cycle where the Cdn market lags the US into a bear market by about 6-12 months due to the tendancy of commodity prices to increase sharply towards the end of the business cycle. I remain a long-term commodity bull but think that we have seen most of the gains this cycle as prices have moved too far too fast and the fundamentals cannot catch up. I was an oil bull at $90 but at $125 the effects on consumption will be gradual but strong. I will probably sell gold into any near-term strength.

MARKET POSITION: SHORT EQUITIES (10 units); LONG GOLD VS. SHORT REAL ESTATE (2 units)

Short Squeezed

Aargh. Last week was awful. Terribly frustrating watching my performance go in the tank. Other than gold (which was up&down) all my positions moved against me. The worst move was the S&P/TSX, which is back where it was in the fall (and is a large position). HXD moved more than the index, indicating there may have been a short squeeze. The index itself has moved more than 12% in the past month, also suggesting a bear market short squeeze. Indices do not usually move like that, especially in bull markets, which tend to be slow upward grinds. I get the strong sense right now that people are jumping back into the market, worried that they may be missing the recovery. Perhaps I need to start introducing some stop losses, but I am not sure. I do not want to be stopped out and then miss the turnaround.

Economic news this weak continues to be weak. NY manufacturing survey showed no growth but the forward-looking parts of the survey were poor. Housing starts and Philly Fed were terrible, and initial unemployment claims ticked back up, with the 4 week moving average staying at 375k. The one bright spot was leading indicators, which actually moved slightly higher. I don't want to discount the leading indicators too much, but one up month does not make a trend. The other data still seem to be showing that we are in the early stages of a recession.

Financial data this week was confusing. The problems in the money markets continued, with LIBOR ticking higher and the TED spread and discount rate spread both remaining elevated. The bond market got whacked, with the 2 year Treasury trading well above 2% (up about 100bps from its low), and the 10 year Treasury up over 20 bps in the week, although it rallied strongly Friday afternoon. The bond market seems to have decided that, with inflation high and sticky to the downside, that the Fed may soon be done with its cuts. This could be bad for equities, if the Fed is prevented from cutting more even if the economy is weak. Currencies are showing that risk aversion has gone away for now, as the EUR/YEN is at almost 164, and CHF is also down. The most confusing trend though is the DJ Transports, which have rallied HUGE from their January lows and breached the October highs, even though oil is at $115, airlines are going under and UPS/Fedex are reporting problems. What gives? Is this a sign that oil prices are not sustainable, that the economy is actually doing OK, or is the market on smack? Definitely a trend to be closely watched.

MARKET POSITION: SHORT EQUITIES (10 units); LONG GOLD VS. SHORT HOMEBUILDERS (2 units)

Portfolio Performance

March was a difficult month (and so was the first part of April). There have been numerous reports of well-known hedge funds suffering big losses, but that is small solace. I made two fundamental mistakes last month: 1) not covering my short positions in the aftermath of the Bear debacle, and 2) entering into the long gold / short homebuilders trade. The first I should have known and discussed last week. The second was premature. I had been saying since Christmas that gold was overbought. I still need to work on being patient. There is no imperative to enter a trade. It is acceptable to hold cash.

So far my call earlier this week seems to be correct. But we will not know for some time whether I was truly right. This market is all over the place. It could rally sharply higher next week -- who knows? The price action the past couple of days was good (for me, being short). The market tried to move higher mid-day Thursday but failed, and then slowly ground lower all day yesterday, closing near its lows. But the volume was nothing spectacular, so its meaning is tempered. The news yesterday was bad though -- GE surprising on the downside, after assuring investors everything would be fine. They are very international, too. Consumer Sentiment reaching some of its lowest levels since the early 80s. That was a bad time, and this is a bad sign for the economy. So I watch and wait.

Going out on a limb here...

I am going to go out on a limb here and state that it looks like this rally may be over. But first, I want to quickly comment on the past few weeks. The most important lesson I learned was: trade the market you have, not the market you want. At the time of the Bear Stearns debacle, I stated that it looked like a near-term bottom was close in time (if not in price). But when the market did not collapse, I did not sell. I wanted lower prices, and I did not sell because I did not get them. NEVER be influenced by what you want. Trade the market you have. I learned the same lesson again 2 weeks ago with Agco, which briefly traded in the low 50s due to some margin calls (or so it appeared). Looked like a great opportunity to take a long position, but I wanted a slightly lower price and it got away from me. Now it is trading at $67.

Back to the present: The move over the past few weeks has been fast and furious. Some lingering negativity remains, but there is also a lot of optimism around. Many people are stating that the Bear Stearns debacle marked the bottom, as similar bankruptcies have marked major bottoms in the past. Seems unlikely. There was never a big washout. Sentiment never reached extreme negatives (although it was negative), VIX only briefly touched 36. The consensus now seems to be that there will be a recession but it will be short and shallow. Many people are using the rally to show that technicals are good.

Seems unlikely. Typically, you only get such large rallies in the middle of bear markets. And since when were bear market bottoms called by the consensus only a week after they occurred? True market bottoms are marked by pervasive negativity that lasts even as the market starts to grind upwards. No one believes it will last. Not like now.

On this basis I have increased my equity short once again, diversifying into the EAFE short fund EFU.

MARKET POSITION: SHORT EQUITIES (10 units); LONG GOLD VS. SHORT HOMEBUILDERS (2 units)

On patience, market timing, crowded trades, margin calls and deleveraging

Last week was interesting. One that I would like to repeat with a little better patience. I have been saying since the beginning of the year that gold looked like a crowded traded, and I was going to wait for it to correct before increasing my position. Instead I bought another unit almost at the (interim) top. HGU tumbled terribly last week. Even worse, the US homebuilders performed very well, so both sides of my new trade moved against me (rather rapidly), causing a serious dent in my performance.

In fairness, it looked like a lot of trades were blowing up last week as margin calls were made and funds deleveraged. Commodities took the brunt of it, with oil, metals and the ags getting smashed. The yield curve flattened, even as yields on very short T-bills went to almost zero and TIPs yields moved positive again. In the equity markets, the indices were all over the place. In the end, SPX was up about 5% from its lows, while S&P/TSX was down, finally closing much of its perfomance gap with SPX.

I am remaining bearish on equities and positive on gold. The market is certainly far from its full bottom, and there is also little evidence that a short-term trading bottom has been formed. We still have not had a downside blow-out. The VIX jumped to 35 on Monday but it was very brief and rallied strongly from that level. Sentiment is poor but has yet to be seriously tested. There seem to be many people that assume that the bear stearns debacle marked a bottom and the markets are headed higher. This may be somewhat true but the upside seems rather limited. We are not going to have a 20% bear market rally when the market is only down 20% from its peak. In addition, the market has already rallied over 5% from the bottom. Not enough upside for my purposes i.e. the risk/reward looks terrible.

Gold miners, on the other hand, start to look attractive after a 12% fall in value over a few days though I am reluctant to increase my exposure there after last week. The agricultural equipment makers also look interesting after sharp declines on Thursday -- seems they have been caught up in the commodity price crash. But as I have said before, it is not necessary for whet prices to remain at $10 for these companies to perform very well. I will likely take a wait-and-see attitude this week, keeping an eye open for opportunities that may open up in the turbulence.

TRADES: SHORT EQUITIES (8 units); LONG GOLD vs. SHORT HOMEBUILDERS (2 units)

Waiting for the next shoe to drop

When I wrote the post on Feb. 29 ("getting close to meltdown?") I was not expecting this. A major investment bank, one of the Fed's primary dealers, on life support. I was also rather surprised how the pessimism never lifted this week after the Fed's big announcement on Tuesday. Shows the financial system is in really poor shape. The central banks in the US and UK are completely out of their depth. They are used to having the financial markets at their beck-and-call. If there were any serious problems, they made a few soothing statements, lowered interest rates, and everything was fine. But such is not the case this time -- they are lost -- and I get the impression that things are going to deteriorate until governments get involved.

I will re-iterate what I said last Saunday, that in the past, such periods (where the situation has looked really bad) have been good times to invest. But even if we are close time-wise, we may not be so close price-wise. This week will be a major test.

On Friday (March 14) I closed out my position in HEU at a small loss. If markets are going in the tank, I don't think it's a good idea to be long energy shares. On the same day I took a short position in the US hombuilders (ticker SRS) to counter-balance the long gold position. I think this is a good trade and may increase it if it performs well. House prices in the US need to fall substantially more in real terms. Either nominal values will fall and inflation will stay low, or inflation will pick up and the adjustment will happen that way. If nominal house prices fall, the homebuilders will get seriously screwed. Probably a few of the really big names (e.g. Toll, Lennar, Horton) will go under. Alternatively, if inflation picks up even more, gold should continue to do well.

I still am waiting to enter the agricultural equipment makers at a good price. If there is a sharp drop in their share prices in the near future, I will probably take advantage and start to build a position.

TRADES: SHORT EQUITIES (8 units); LONG GOLD vs. SHORT HOMEBUILDERS (2 units)

More of the same

Global markets were very weak Monday as liquidity tightened and risk aversion increased. Tuesday was looking pretty ugly until the Fed showed up and offered to take $200B of crappy mortgages onto its balance sheet. The markets bounced initially (equities in particular were up very strongly) but now seem uncertain. Today's action was both positive and negative. USD continues to plum new depths against EUR and JPY indicating more risk aversion and less love for the USA. On the latter theme, the US Treasury 10yr auction today was very weak, and apparently foreign participation was almost non-existent. Perhaps we are finally nearing the lows in treasury yields. It IS pretty crazy that people are willing to accept 2.5% nominal yield when inflation is currently over 4%. You need to have an absolute collapse in nominal GDP growth to justify such yields, which seems inprobable. Ben has shown clearly that he will do whatever it takes to keep the economy out of a deflationary trap.

On that note, the Fed's actions seem likely to have the same effect as in the recent past -- propping up financial markets for 1-2 months before the problems return. Commodities continue to be well-bid, with oil at $110 and gold touching $1,000 today. I continue to believe that we will have some sort of correction at some point but timing is uncertain and prices will probably not fall as much as I thought earlier. So I finally dipped my toe a little deeper in the water and increased my gold holdings by one unit, plus one unit of energy companies. These should both perform well in the medium-term given current gold and oil prices. However, I also note that I added the position today at a time when I was very tired and stressed, and my judgement on the timing may not have been optimal. Time will tell.

On a portfolio admin item, I am re-basing my calculations of units to account for the fact that my holdings of SDS / HGU have perform much better than HXD.

MARKET POSITION: EQUITIES - SHORT (8 units); GOLD - LONG (2 units); ENERGY - LONG (1 unit)

Where to from here?

The fixed income markets are in a very tight spot. Swap spreads are the highest in at least 20 years. There is a lot of pricing dislocation as investors flee to quality. The corp. bond market has virtually dried up, and apparently off-the-run treasuries were trading sluggishly on Friday. Traders are very nervous. Pricing dislocations abound. There has even been some "end of the world" type talk.

Is this the end of the world? Maybe, but probably not. There are certainly some aspects of the current situation that very serious, and probably make it worse than previous episodes. In 1998 there was essentially one hedge fund in trouble, albeit one that was very large and had significant linkages throughout the major banks. But currently, it is the banks themselves that are in trouble, and it is not just one. Bank capital is low and declining, forcing banks to protect their balance sheets. An incipient recession and housing bust provide a negative backdrop, while large CDS exposures and mark-to-market accounting threaten to amplify price declines. The Fed has increased liquidity multiple times over the past 7 months, but it has failed to correct the problem or reduce the sense of crisis. Even worse, there is no leadership and no reasonable proposals on how to get out of the mess.

In the past, such overly negative situations have signalled major buying opportunities. Is now such a time?

I would argue that we are near time-wise, but still have some way to go price-wise. Prices tend to go down exponentially in a "blow-out" situation, and we have yet to see such movements. Fixed income is arguably much of the way there already. Equities have started, but as I mentioned before, the movement has been remarkably gentle given the situation in the fixed income markets. Equities almost certainly have much farther to go. Commodities may act as the signal of the final turn. There appears to be a lot of speculation and risk capital in the commodities. When that money is finally pulled and prices get hit, it will be a strong signal that the end of the slide is nigh.

MARKET POSITION: EQUITIES - SHORT (11 units); GOLD - LONG (1 unit)

Portfolio performance

I will post this at the end of each month from now on. Performance at the start was dismal, but I feel I am improving. The trading portfolio just barely outperformed T-bills to March 7 close.

Wile E. Coyote moment

Global equity markets are markedly lower this week, but the slide so far has been rather orderly. The situation reminds me of last July or early January. The other, larger financial markets (FX, bonds, credit, commodities, etc) are signalling major problems, yet the equity markets are only just beginning to cotton on. USD/EUR is much lower, short-term government bond yields have collapsed, credit spreads (swaps, LIBOR, corporates, munis, agencies -- you name it) are blowing out, gold is pushing $1,000 and oil is well over $100. Banks are short capital, risk aversion is high, and liquidity is tight. 5 year TIPS real yields are now less than zero! The response? SPX is still above its January lows, and VIX is at 26.5. It's like the equity market has run off a cliff, but is only just realising it now....

Just to throw in one more issue: inflation expectations appear to be rising in the US treasury market. No wonder -- surprising it took so long. This is negative for earnings multiples. And I am not going to discuss the monolines.

As for the economy -- it's not looking good. Not terrible, mind you, but not good either. Both ISM surveys were below 50 this month. As the 4 week moving average of initial unemployment claims remained above 350k for the 3rd week in a row today, I feel comfortably declaring that the US is officially in recession. The ISM and unemployment numbers were not as bad as the market feared, but that does not mean the recession will be short or easy. This is only the beginning. It is natural that the indicators will be mild at the start. It's really the trend that matters. And the trend is not good.

As mentioned above, gold and oil continue to power higher. I am wary of jumping in here. No need to be greedy. Patience will be rewarded on the commodity trade. I think commodity prices will take a big hit sometime soon as people re-equate the US slowdown with lower demand for commodities. They will probably also be affected by the tightening of liquidity and falls in other asset prices. But that will set-up a good buying opportunity. This commodity bull market is far from over -- it's just gotten too far ahead of itself at this point.

MARKET POSITION: EQUITIES - SHORT (11 units); GOLD - LONG (1 unit)

Getting close....to meltdown?

Yesterday the 4 week moving average of initial unemployment claims was above 350k for the second week in a row. This is a bad sign for the economy. Other data out the past week has been awful -- home sales, durable goods, home prices, consumer confidence, inflation. On Monday the ISM manufacturing will be released, and it should show that manufacturing contracted in February, confirming the start of a US recession. Financials continue to disclose major losses while corporations have started to anounce layoffs. Mortgage rates and spreads for much corporate lending have ticked higher over the past month even though the Fed cut rates by 125 bps.

Despite the abysmal news, the equity markets performed fairly well the past week, rallying higher on several days. I admit this made me uneasy -- a market that can rally on bad news may be a market that had already priced in the bad news, and is now ready to move higher. I am more than willing to admit this is a possibility. But the more likely scenario is that it was a short-covering rally / bull-trap. It seems that I misjudged the level of short interest out there (there is a lot), and probably some people were forced to reduce positions into the rally. My primary rationale for this belief is that the bond / credit / FX markets are not confirming the equity rally. TIP yields are still very weak, treasuries seem to have plateaued, credit spreads are going ever higher, and USD keeps sinking. If equities were really going to mount a sustainable rally, I would expect at least some of these markets to provide some support.

So the million question is: how long can the market hold up in the current barrage of negative economic, financial and corporate news? The answer is: probably not very long. In fact, there are some signs that the rangebound nature of the past few weeks is coming to an end. US equities faltered late-Wednesday of this week then were down about 1% yesterday. European equities are down over 1% this morning. More importantly, JPY/USD has moved downwards by an incredible 4 yen over the past week, including about 2 yen in the past 24 hours. JPY/EUR has moved by 2 yen in the past few hours. Could this signal the start of the next phase of meltdown?

As mentioned last week, gold and oil continue to power higher, and I think this may continue for a while longer. It is instructive that there seem to be no "serious" analysts predicting $120 oil. Everyone seems convinced that the price is so high due to "speculators". Are all the hedge funds in the world long? Perhaps, but the real money investors do not appear to be, setting up the possibility of much more upside to come. I am rather annoyed that I did not get long energy shares in mid-January when I looked at them closely. Oh well, there will be another time -- this is a long-term story and patience is neccesary. What is much more annoying is that the TSX continues to strongly outpeform SPX on the upside, causing immense pain to my holdings of HXD. Given the expected strong performance of commodities for the foreseeable future, I will take advantage of any future weakness in the TSX to exit my HXD positions. Heretofore I will focus the short trades on other markets / sectors.

MARKET POSITION: SHORT - EQUITIES (11 units); GOLD - LONG (1 unit)

One down, one to go...

I have said that I am looking for 2 things to confirm the start of a US recession: 1) the 4 week moving average of initial unemployment claims above 350k, and 2) the PMI below 50. Number 1 was confirmed today. Number 2 is not quite there. Although the PMI dipped to 48.4 in December, it rebounded to 50.7 in January. But I think it will be below 50 for Feb. Today's Philly Fed index was terrible. Manufacturers seems to be getting dragged down by all the gloom. There is a spreading malaise. Although many companies still have strong sales, they are getting worried about the future, reducing investment and stopping hiring. This is recessionary behaviour.

The big question is whether this will be short-lived, or whether it will morph into something long and severe. There are some good reasons for both. I have not yet decided, though I am leaning towards short-lived. TIPS have ticked up a bit over the past few sessions -- I am going to watch this closely to see if it might be indicating a return of econ. growth later this year.

As I predicted a couple of weeks ago, US equity markets have remained range bound. There seems to be some consolidation going on. I still believe that the next major move is more likely to be downward. The market has not yet fully discounted a recession. VIX is still only 24.5. When it happens, it will be time to cover my shorts and wait for the rally.

The Cdn equity market, on the other hand, has been rather strong over the past couple of weeks, and the divergence between Toronto and NYC is quite large. This is atypical, though perhaps not for this point in the cycle. I mentioned this was a possibility many months ago as I was worried that a strong commodity performance would hold up Cdn equities as US equities fell. It was the major reason I bought some SDS. But I am feeling a bit frustrated now. I am seriously considering two options: 1) reduce my HXD exposure in favour of SDS, or 2) increasing my holdings of gold plus adding energy to provide a sort of hedge. Ideally, the two positions would both perform well. The problem is timing...I am not sure if now is the best time. The one month return difference is quite large, and should narrow.

Gold and energy are up nicely over the past week, prompting me to review my position that they would fall further before moving up again. Gold has reached new highs in the past few days, and $1,000 now seems easily within reach (this seemed ridiculous not so long ago). The most interesting part is that gold cos. seem to be valued at a long-term price of $600-700. Oil related cos. are similarly valued at an oil price of $60-$70. Oil recently reached $100. Everyone thinks the price is crazy and must fall -- few people are predicting $120. This looks like a good contrarian bet from my perspective.

MARKET POSITION: EQUITIES - SHORT (11 units); GOLD - LONG (1 unit)