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)