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)