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)