CDN Trader

Uggh.

2008-12-02T11:43:00.003Z

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

2008-11-09T13:47:00.004Z

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

2008-10-30T10:28:00.002Z

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

2008-10-26T21:34:00.002Z

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...

2008-10-18T20:48:00.006+01:00

...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

2008-10-12T22:20:00.005+01:00

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!

2008-10-02T21:52:00.004+01:00

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!

2008-09-29T21:58:00.002+01:00

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

2008-09-26T11:52:00.002+01:00

(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

2008-09-21T20:41:00.003+01:00

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

2008-09-16T21:27:00.006+01:00

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

2008-09-10T21:59:00.003+01:00

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

2008-08-31T14:16:00.005+01:00

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

2008-08-11T16:32:00.002+01:00

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

2008-08-04T13:46:00.003+01:00

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

2008-07-21T18:07:00.004+01:00

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

2008-07-14T20:59:00.005+01:00

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

2008-07-13T10:44:00.006+01:00

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

2008-07-06T21:33:00.003+01:00

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

2008-07-01T18:06:00.003+01:00

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

2008-06-26T22:10:00.003+01:00

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

2008-06-22T21:45:00.003+01:00

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

2008-06-11T05:03:00.004+01:00

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

2008-05-21T16:05:00.003+01:00

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)

2008-05-18T20:19:00.002+01:00

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)

2008-05-12T13:34:00.003+01:00

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

2008-04-20T13:17:00.004+01:00

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

2008-04-12T13:56:00.005+01:00

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...

2008-04-08T16:33:00.002+01:00

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

2008-03-23T23:16:00.003Z

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

2008-03-16T21:29:00.004Z

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

2008-03-13T22:19:00.002Z

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?

2008-03-09T23:29:00.003Z

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

2008-03-09T13:03:00.002Z

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

2008-03-06T17:32:00.004Z

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?

2008-02-29T11:22:00.005Z

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...

2008-02-21T16:12:00.002Z

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)

Rangebound

2008-02-12T13:32:00.001Z

First, I think it necessary to address my last post, where I changed my mind about the direction of the market and decided that it was headed lower. In retrospect, this was not a terrible call (the market is currently about where it was that day), but again I was a bit impatient and rushed the trade. I previously had stated that I thought SPX would go to 1380, and I was waiting for some more optimism to return. Well, SPX reached 1396 on Feb. 1st, and again there were stories suggesting that a recession was not certain. Vix also retreated nicely. That would have been the best time to re-establish the short. C'est la vie...

On to today. The market seems to be slightly rangebound, awaiting direction. US equities were up yesterday on no real news, and European bourses are rallying strongly today on fumes. There is a possibility that this could turn into something bigger. Markets are down considerably over the past 2.5 months so a rally is not impossible. A recession still does not appear to have started yet in the US (my two criteria -- initial unemployment claims 4 week moving average above 350k and PMI below 50 -- have not yet been breached), allowing for some optimism that the bullet might be dodged. The Fed reduced rates by a silly 125 bps in one week.

But that does not seem to be the most likely scenario. A bear market rally may come soon, but I think there needs to be a real intermediate washout before it can be sustained. The Fed's inter-meeting cut prevented this from happening in January, but it needs to happen at some point. It is normal. It could happen when investors finally realise that a recession has started, and they can then comfort themselves by hoping that at least it will be short and shallow.

Gold still seems very overbought given conditions in bond markets. There is a good chance that it could fall sharply back to the $650-$700 range. But long-term I remain bullish so I will continue to hold my unit, hoping to add at better prices.

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

I changed my mind

2008-01-28T17:35:00.000Z

I changed my mind about the market. I changed it several times, in fact, but I have settled on the reverse of my position last week. I now think that the market is more likely to go lower. There are several reasons for the change. First, because US markets were closed last Monday and the Fed made it's dramatic 75 bps announcement Tuesday morning, the markets never had the big, fast drop that slides usually end with. Last Tuesday's and Wednesday's lows were ultimately unsatisfying in that they did not shake out enough longs, and emboldened many (including myself) to gamble on some upside. Indeed, too many people have been saying that last Tues/Wed marked intermediate lows, and the market is poised for a good rebound before falling lower again. This suggests that too many people have assumed the worst is over for the time being and put risk back on the table.

Last Friday's slide was also indicative of a weak market. The high was at the open, (and slightly short of my 1380 target for SPX), and the market did not see it again all day. Despite a bit of a rally today, we are still far below Friday's high. This is not the sharp rebound that I was expecting.

Finally, today's new home sales data was aweful, providing another reminder how bad the economic situation is likely to get. I am not sure what Bernanke and co. are going to deliver on Wed, and I don't really care, but I don't think the market is going to be happy whatever it gets.

I returned to my previous short level earlier today, purchasing 3 units of HXD and 2 units of SDS.

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

Chill-Out time

2008-01-24T17:17:00.000Z

It's Chill-Out time for the equity markets. It got a little heated at the beginning of the week, but the scene is a bit calmer now. VIX is down to 28, the US 10 yr is up a whopping 22 bps as I write this, and the global equity markets have bounced off their lows. The tone of the media has also changed. Although it is impossible to measure this scientifically, it seemed that ALL of the stories on Tuesday / Wednesday were doom and gloom, whereas the mix is much more balanced today. Positive stories today included the bail-out of the monolines and progress on the fiscal stimulus package. This will be important to watch as it could have a strong impact on the markets when it finally goes through Congress, though I am sceptical about the final impact on the economy.

Light week data-wise. Initial unemployment claims were surprisingly low again today. This also needs to be carefully watched. If this remains at such a low level, it will be a major hole in the recession story, which has now become mainstream. Existing home sales were very poor today, however. Lower interest rates seem to be having an impact on refi applications, but the banks and consumer credit companies see rising losses on the horizon and they are scared. Anecdotal evidence suggests a BIG decline in new auto loans, for example.

I expect the market to bounce around a bit here but ultimately move slightly higher over the short term. Not surprisingly, the chatter is still somewhat negative, and I will wait for some optimism to return before re-establishing my full short position. This is a risk management exercise more than an attempt to goose returns. I am looking for SPX to reach about 1380, maybe higher.

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

The end of the beginning?

2008-01-22T21:36:00.000Z

Was today the end of the beginning of the bear market? Only time will tell for certain, but there were a few prominent signs. After Asian stocks fell hard for two days running, the international media were screaming about a stock market crash when NY opened today. After the Fed cut rates 75 bps in a surprise inter-meeting move, the market only opened down about 4%, then rallied through the day to close down 1%. This is the first market move greater than 3% in some time. In response, VIX hit 35 this morning (see last Friday's post re: VIX).

These facts led me to close out 5 units of my short position near today's close. I waited through most of the day to see if the market might collapse (as it has done several times recently) but it held up OK. This was a sign the market might finally be finding some support, though it also meant that my price was not great. In particular, I gave up all of yesterday's gain in HXD. Well, one should try to be as dispassionate as possible.

I am thinking there may be a short rally from here as the market finally clears its oversold position. Could last anything from a few days to a few weeks. I plan to re-establish the shorts, hopefully at better prices. I am hoping that I am not attempting to time the market too closely here....

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

What is VIX telling us?

2008-01-18T16:52:00.000Z

A quick (admittedly non-scientific) comparison of VIX and SPX since 1990 suggests that, in major market declines, SPX typically bottoms once VIX reaches about 32-35. However, in the most severe market declines (1998, 2001, 2002), the decline did not happen until VIX spiked over 40. As I type this, VIX is about 28. This is well above its level one month ago, but still well below the levels typically seen at a market bottom. From this perspective, it is not surprising that today's early rally was not sustained. VIX says there is still more downside to come. And if this is a severe market decline -- which, given the economic circumstances, it may be -- the additional downside may be considerable.

S&P/TSX closes below Nov. lows

2008-01-16T21:17:00.001Z

The north american markets faltered towards the end of trading today after trying to rally mid-day. The S&P/TSX closed below its Nov. intra-day low. Based on this sign of inherent weakness, I decided to increase my short CDN equities position. The TSX has not declined as much as SPX over the past month and therefore it is also a convergence play. I increased my holdings of HXD by 2 units at today's close (22.50).

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

Goodbye liquidity crisis; hello economic crisis

2008-01-16T17:20:00.000Z

Libor finally fell below Fed funds yesterday, signalling the end of the liquidity crisis. I guess bankers have finally realised that the Fed will do what it takes to save the financial system, and it is highly unlikely any of the major players are going to go bankrupt (I present Countrywide as an example). But the liquidity crisis, lasting as long as it did, was a major shock to the US (and most developed countries) economies, and it seems pretty likely that a recession is very close if not underway already. I know I said this a few months ago, and obviously I jumped the gun, but the data has got considerably worse since then, and many other respected players are saying the same thing. Worse (for the economy) is that general consumer and business sentiment seems to have fallen off a cliff, and it will be very hard to bring that back in the current environment. Companies continue to announce layoffs and house prices seem to be in free fall. I said in the past that I would not officially announce a recession until the PMI falls into the low 40s and the 4 week average of initial unemployment claims moves above 350k, and I will stick to that. But it does not look good.

The financial markets are telling the same story. Swap spreads have increased over the past few months and look set to move wider. EM spreads have also started to move out. Asset-back CP spreads have moved in from their nuclear holocaust levels but remain relatively wide and the yield curve is inverted once again. Treasuries yields have plummeted and the 10 year yield is now substantially less than 12 month CPI. SPX is down about 11% from its high even though we are 4 months into a Fed easing cycle -- not good. Oil and industrial metals are finally coming down in recognition of the slowing in the US. On the other hand, gold is pretty strong (though off recent highs), presumably as the market realises that the FED has no choice but to further debase the USD to save the US financial system and economy from depression.

Equities indeed fell over the past week, though the decline was relatively orderly -- no big drop as I suggested last week. As I have mentioned before, this feels very much like a bear market. There have been no really big down days (all less than 3% declines). Sentiment is interesting. Although the talk is very negative, and surveys are showing excessive bearishness, there is also a lot of people saying that the market is oversold and it is time for a relief/rebound rally. There are also a lot of people who recognise that the economy is in bad shape but refuse to see how bad, and think the Fed can still save the day. But every time the market tries to rally it falters after a relatively small move.

I remain as last week. I am waiting for a rally before adding to my short equities position. Gold stocks soared last week (as gold went over $900) for a whopping 60% gain over the past few weeks, making me slightly annoyed that I did not add to my small position. But I still believe that the rally is somewhat premature. Investors are looking around and trying to see where they can put their money that's recession proof, and gold is an easy answer. Gold has soared similarly in the past and then given the gains back in a short period. Gold will go higher over the next couple of years but the big moves will be gradual. I will wait for the current pandemonium to calm down before I increase my position. Bonds continue to perform well, but I think they can go still further as long as the yeild slide is gradual.

MARKET POSITION: EQUITIES - SHORT (9 units); GOLD - LONG (1 unit)

Volatility often presages market declines

2008-01-08T19:53:00.000Z

The type of volatility the equity markets have been experiencing the past few days -- up 1% one minute, down 0.5% 30 mins later, is often a precursor to large market declines. The market is fighting an internal battle as it debates whether the economic outlook is really as bad as it looks. Of course there is no guarantee which direction will win out, but my bets are clear. I am not going to increase my position at current levels, but I probably would if SPX goes above 1460 again in the next week or two. Otherwise, I will wait for the next throwback rally.

Outlook for 2008

2008-01-04T19:15:00.000Z

It's been a while since the last post as I got caught up in holiday activities. I was also waiting for some more clarity on the economic front, which was provided this week. A US recession has probably not yet started, but the economy appears to be on the edge, and the trend is not good. Manufacturing PMI was below 50 this week and December employment numbers were weak. Holiday sales were also pretty weak. Consumers have not yet rolled over but they seem to be worried. No wonder -- with house prices falling, foreclosures rising, and companies starting to announce mass layoffs -- it is only logical. FOMC minutes showed that the Fed is much more worried about the weak economy than inflation.

Equity markets were weak in the Christmas-New Year's period and this is ominous. Typically the market rallies pretty hard around this time of year, and for it not to happen means that the market is weak. The large decline in the Nikkei yesterday was also a warning. I am not yet ready to declare a bear market (I will wait until SPX decisively breaks through the August/November lows), but it sure feels like a bear market. Rallies are not sustained; if the market opens higher, it falls towards the end of the day. And there are few people talking about the fact that the market is well off its highs. The bond market has rallied smartly over the past week and yields are now back where they were several weeks ago. Ditto with currencies.

Gold has also jumped back up and is now above its all-time high. Part of me wants to take this a buy signal and increase my position, but I think that the current gold rally is premature. People have decided that they do not want to increase their equity position so they are casting around for alternatives and they choose gold. But gold will probably get hit in the impending equity meltdown, even if it is one of the last to fall. That will be the time to increase gold, along with oils and agriculture.

Although I generally dislike it when seers write their predictions for the upcoming year (as they are usually wrong), in my case it is a good idea, as it forces me to order my thoughts and justify my positions. Most importantly, it provides a record of my thoughts at this point in time, which is one of the major reasons for this journal.

My long-term outlook for monetary policy is based on the fact that consumers (and some corporates) have undertaken a massive increase in debt over the past 7 years. The Fed knows that a debt-deflation spiral is real possibility so they will do all they can to prevent it. The only way out is through easy monetary policy and higher inflation -- essentially inflating some of the debt away and allowing households to gradually repair their balance sheets. That will probably take several years. Once that is more or less complete, and inflation expectations start to really get out of control, the fed will be forced to jack up interest rates, causing another recession.

So I continue to expect a major decline in equities globally as the economic reality sets in. This could be imminent (SPX is down over 2% as I write this), or it could be next month or in March. But it is probably sooner rather than later. Bonds will do well but commodities (including gold and oil) will probably get hit, though they may fall slightly later. Once that happens, it will probably a good idea to exit long bond positions and increase exposure to gold, agriculture and oils. Probably emerging markets as well. I expect these to be the major growth areas over the next few years. But I will probably stay short of the major indices for a while longer. The upcoming recession could be severe, and equities probably have far to fall.

MARKET POSITION: EQUITIES - SHORT (9 units); GOLD - LONG (1 unit)

Let's recap, shall we?

2007-12-12T18:06:00.000Z

A brief review of the facts:

Most forward-looking indicators (e.g. PMI, durable goods, etc) are showing that the economy has slowed dramatically over the past 2 months
The housing situation, while difficult to say whether it has become worse, has certainly not become any better.
The labour market is weak. Payroll numbers have help up OK (though their accuracy is debateable) but the 4 week MA of initial jobless claims continues to increase, and is approaching worrisome levels. A rise past 350k would be a strong signal that a recession is underway.
Consumer confidence is plummeting, particularly future expectations. Surveys show that a large percentage of Americans believe the economy is already in a recession.
Energy prices remain punatively high, despite the retreat from recent highs
Despite 100 bps of cuts from the Fed (plus BoC and BoE cuts), LIBOR remains high, the credit markets are glued up, and the stock market is 5% below it highs (as I write this SPX is 1490).

Is this a pretty picture? One that points towards a return to healthy growth and profits next year? I think not. So I must continue to stay short, wait and be patient. The market will come over eventually.

Speaking of patience, once again I rushed the trade last week to increase my short position. Although I wanted to increase around 1500, and saw that as a reasonable place to enter, I jumped the gun and made the trade before the market was able to get there. It was not an outright stupid move (I still believe that next year selling at 1465 will look pretty smart) but I could have got much better execution if I had been patient.

With less than 3 weeks left in the year, it's difficult to foresee how things will develop. It is possible we will get the usual Santa Claus rally and could even see SPX back close to its high. But if that were to happen, I would expect January to be pretty ugly.

MARKET POSITION: EQUITIES - SHORT (9 units); GOLD - LONG (1 unit)

Market offers more opportunities

2007-12-04T16:46:00.000Z

The market continues to offer opportunities to increase my short position. After a hard and fast rally last week, the market seems to be weakening again. No surprise, given the events in the credit markets these days. A growing number of people are starting to say that a recession may be just around the corner. Housing, employment, consumer confidence, profits are all weakening. And the market is only 6% off its highs! A testament to human optimism and trend following.

I think by the middle of next year, now will be seen as an incredible opportunity to go short. Last week's oversold condition has been rectified, and the market is ready to start declining again. So I am taking this opportunity to increase my short position by two more units. I was hoping to be able to do it closer to 1500 on the SPX, but I am not sure we are going to get there with all the negativity these days.

MARKET POSITION: EQUITIES - SHORT (9 units); GOLD - LONG (1 unit)

(Short) Bear Market Rally

2007-11-28T11:43:00.000Z

According to Richard Russell of the Dow Theory Letters, last week's price action confirmed the existence of a bear market in US equities. While I think it is too early to say for certain that we are in a bear market (bear markets, like recessions, can only be identified after the fact), it does appear that way. The market has gradually ground lower, without panicking, some days down more, some less. Importantly, despite a lot of negative data (housing, consumer confidence, financial sector) there is still a lot of optimism around. That is a necessary ingredient in a bear market. Once that is all gone, it is time to start looking for a bottom.

So the markets did fall over the past week as I expected, but the sharp drop that I was anticipating did not occur. That is both good and bad. Bad because I am impatient (though I am trying to work on that) and I want at least a 20% decline NOW, but good because it means that the market has yet to capitulate, and the bear is still alive and well.

Yesterday and today suggest that we may be experience a short bear market rally. This is totally normal after 3 weeks of almost continuous declines. I would not be surprised to see the markets rally 3-6% over the next 1-2 weeks. Not enough to trim positions (my ideal holding period is longer than that) but I may add to the short position if the rally is large enough. The key will probably be the data coming out of the US over the next few days. If it is OK, then the rally should hold. If it is terrible, the markets will probably return to the downside. I do not forecast monthly variables, instead trying to look for trends, so I am not too concerned about one month's data point. For now the economic trend is slowing, the data looks bad, and I expect that to continue for some time.

Gold has turned lower again, and I am starting to get the feeling that it could be some time before we see it over $800 again. I remain a long-term gold bull, but as long as the credit situation is detetiorating and the other asset markets falling hard, it will be difficult for gold to rally. The turning point should come once the Fed reduces rates much further and pumps a lot more liquidity into the system, and the US dollar really starts to take it on the chin. So I will continue to hold the 1 unit for now.

MARKET POSITION: EQUITIES - SHORT (7 units); GOLD - LONG (1 unit)

Situation continues to deteriorate

2007-11-19T20:54:00.000Z

The market situation continues to deteriorate. I was expecting some market strength today folowing on Friday, but instead we have declines. This suggests that the decline could be more steep than I expected, and there may not be multi-day or multi-week rallies (at least in the short-run). To this end I have increased the short position by one unit. I do not want to materially increase my short position after a few weeks of declines, but the greater risk seems to be that the market will fall more quickly than anticipated.

MARKET POSITION: EQUITIES - SHORT (7 units); GOLD - LONG (1 unit)

Patience finally pays

2007-11-16T15:16:00.000Z

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

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

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

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

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

Still waiting

2007-11-08T16:22:00.000Z

The situation has improved slightly from my perspective over the past 1-2 weeks. As I forecast, international equities are noticeably weaker. Indeed, the US market is displaying many of the signs of an early bear market. Gold is considerably higher and the USD is much lower. The problem is that I have made little money. Cdn equities, while off their recent peak, have not fallen as much as US equities. Moreover, the gains on my short US equity position have been negated by the large increase in the CDN/USD rate. Gold is significantly higher but gold equities have not rallied nearly as much. AG is 10% higher but I have not yet taken a position (though I still intend to). Clearly I need to work on structuring my portfolio better -- if one cannot make money when one is right, when can one make money?

Despite the strong fundamentals I am wary of entering AG and increasing my gold position at present. The equity market is drifting sideways today after yesterday's sharp fall, indicating that investors remain wary. I think it is best to keep some powder dry for when the (inevitable?) break comes, and hopefully I can pick up some at more attractive prices. I am also seriously considering taking a long energy position. Energy stocks have not increased very much despite the large increase in oil prices over the past few months. Perhaps most investors do not believe that the current period of high prices is sustainable. I am not sure if $95 oil is sustainble, but I think $70 oil is easily sustainable, and this is probably not yet priced into oil stocks.

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

AGCO Confirmation

2007-10-30T16:03:00.000Z

Agco reported Q3 revenues and profits today far above last year's level and analyst estimates, and guided full-year earnings estimates higher. I take this as confirmation of my assertion that higher food prices will lead to stronger sales of farm equipment. Agco is up 42% since my discussion here in August, CNH is up 35%. I plan to take positions in both sometime in the next 1-2 weeks. I am not jumping into the trade as still think equity markets will trend lower in response to weaker economic news this week, and this may allow me to get a slightly better price. That said, I may set a stop buy in case I am wrong and the market jumps higher.

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

No trading this week

2007-10-29T17:43:00.001Z

I have decided not to trade this week. There are too many important data releases, and this will probably cause the markets to be especially volatile. I am not good at trading volatile markets. This week we have consumer confidence, the Fed, ISM, GDP and non-farm payrolls, to name a few. If I am correct, some (most) of this data should confirm the slowdown in the economy that I think is beginning. If I am wrong, then I need to seriously re-think my macro outlook.

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

Back to insanity?

2007-10-25T16:10:00.000+01:00

Seems that the return to sanity was relatively brief. I did not expect the large fall last Friday to continue, but this week has been bizarre. People on both sides (short and long) are clearly nervous, given the large intraday swings in the equity markets. The bears are nervous that the Fed easing will allow the economy to hold up OK and therefore boost stock prices. The bulls are nervous that corporate profits and the economic data are both weak, and therefore the economic picture might not be as rosy as they imagine. The result is pure noise, very difficult if not impossible to read from a technical perspective.

In such a situation I think it is important to return to the fundamentals. Three factors are key here: 1) the housing market is imploding, and shows no sign of bottoming in the near future; 2) the credit crunch in August has made it more difficult for many households, corporations and investors to borrow; it has also shaken their confidence in the future and made them less inclined to spend and invest; 3) oil has been making historic highs - (even though gasoline is not making new highs, it is still very expensive byt historical standards, as are other oil derivatives). The data also seems to confirm the economy is slowing -- today we had durable goods orders weak and initial unemployment claims moving up (4 week moving average).

The risk is that rapid money growth props up the economy and financial markets for a little while longer. Such a scenario could lead to an upwards "pop" in equity prices that could severely damage my bottom line. I think what is more likely is that rapid money growth will flow into other assets such as gold, commodities, and maybe emerging markets. It is notable that gold is once again testing its highs at $770, despite everyone saying last week that gold was overbought and due for a correction. Could be short covering of course and the correction may still happen, but it is notable nonetheless.

In this situation it is best to wait and practice being patient. In time, the market will reveal its direction, and this will cause me to either add to or reduce my positions.

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

Is sanity returning to the financial markets?

2007-10-18T13:59:00.000+01:00

What a change from a little over 24 hours ago. Then, the major European indices were up 0.5%-1%, apparently on the news that Heineken and Carlsberg were interesting in buying rival brewer S&N. The US markets then opened higher following the news that housing starts had declined by a very large number, and inflation was slightly higher than expected.

Now, the european indices are down considerably, bonds are trading much higher, and the yen is rising. What happened to the no-brainer risk trade? Have people finally realised that the Fed cannot save the day? Is sanity finally returning to the financial markets?

It will take several weeks, if not months to answer that question. In the meantime, I hope to start seeing some positive returns from my short position. During the collapse in the US markets yesterday I added to my short position, buying 2 units of SDS at 50.40. After the rally at the end of the day yesterday I thought maybe I was a little hasty, but it looks like today's open will redeem my decision. This sell-off/correction (call it what you will) is starting to feel as if it has some legs, and may continue for some time.

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

Some short and longer-term thoughts on the markets

2007-10-15T16:58:00.000+01:00

The market is (so far) down about 0.5% today and is farther off its peak last Thursday. I would like to think that this may be the start of a longer-term trend but I have learned to be more careful in my short-term predictions. What I can say with a fair degree of certainty is that all of the elements for a large correction remain in place. The economy is definitely slowing, the credit markets remain glued up (though less so than a few weeks ago) and corporate profits are hurting. The general sentiment is that the situation is not that bad and the Fed is cutting so the economy will be back on its feet in no time. I continue to believe that this looks more like the end of the cycle than a mid-cycle slowdown. Anything else is probably wishful thinking.

I cannot say with any degree of certainty when the correction will take place, but when it takes place it will be rapid and it may not seem that serious at the start. People will believe that it is just another small reversal after a period of large gains. This makes it better to stay short and wait for the correction to come to me.

It is also difficult to know how large the correction will be. There has not been a significant correction (over 10%) in many years, making one long overdue. But whether it will be 10%, 15%, 25% or even 40%, depends on the evolution of the economy.

So in the short-term, I remain short equities, and I think bonds could also do well in the initial stages of the stock market correction. Looking farther out, once the correction looks like it is ending, I think the global inflation trade will be the best bet. Emphasis on 4 areas: 1) commodies / natural resouces (gold, energy, mining, etc.). These have done well over the past five years but there is still a long way to go; 2) emerging markets, especially those that produce a lot of commodities; 3) companies that produce products for commodity producers (e.g. I mentioned the agricultural equipment makers last month); 4) Japan - the return of global inflation should finally cause Japanese prices to rise, and Japanese assets will also reflate in price.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)

Slaying a Bull is a Long Process

2007-10-08T16:08:00.000+01:00

Anyone who has ever witnessed a bull fight knows that slaying a bull is a long process. Especially a large and strong bull such as the one currently in existence in the global equity markets. Clearly I was too hasty to declare the start of a bear market in August. Instead of increasing my short position, I should have covered and gone long. I made the wrong move.

But I do not think now is the time to cover. Despite an extremely bullish sentiment, the market is exhibiting signs of getting tired. The rally is being driven by a small number of stocks. Other than the DJIA, other indices remain well below their June/July highs. The Nikkei is still down considerably. Gold is $100 higher, yet the US 10 year is 60 bps lower than its peak.

Similar news on the economic front. It is not as weak as I previously thought. Yet a serious slowdown is evident. Employment, manufacturing and spending are all well down. House prices continue to decline as inventories rise. As I keep saying, I can't imagine people are going to continue spending as they become concerned about keeping their house and their job. But most economic commentators think the economy will avoid a recession. From my perspective, this would be incredibly lucky indeed.

Of course, the economy has not entered a recession yet. Leading indicators such as the ISM and initial unemployment claims are still holding up OK. But once it becomes obvious the economy is in recession, it will be too late from a trading perspective. One must look out and anticipate what will happen. And it appears that the balance of risks is to the downside. The situation is clearly weaker than July, yet the equity markets are at about the same level. I would rather be short than long.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)

Sitting Tight

2007-09-27T20:35:00.000+01:00

That's right, I have decided to sit tight. The market continues to move higher against me. It is now clearly through my pre-planned stops. Proper risk management states that I should sell down my position. Am I a deer in the headlights? I sure hope not.

The fundamentals continue to suggest the market is past its peak. The housing market keeps getting worse. This has got to start affecting consumer spending at some point soon. Initial unemployment claims so far show the job market is fine, but that cannot carry on forever once spending starts to slow. The credit markets are making good progress at returning to normality, but overall interest rates have not yet returned to where they were a few months ago, even after the Fed easing. The volume of CP outstanding is still shrinking, and apparently some banks are still shut out of the interbank market. Banks have started to unload some of the leveraged loans but the process is only starting and apparently the amount on their books from the big spending spree earlier this year ($300+ billion) is almost as much as the total amount of leveraged loans held by asset managers, etc. It is going to be difficult for all this to be absorbed, and until then, the banks are not going to want to fund new LBOs, hence no more takeover premiums on stocks (despite all the hype about Bear and Sallie Mae today).

Of course this is only speculation but I wonder about the effect of quarter-end tomorrow. Are lots of investors clamouring to get back into the market before they close their books? What other effects might be at work here? Next Monday also marks the start of October, a traditionally difficult month for stocks.

On gold, my entry was clearly timed poorly (I seem to have a knack for poorly timed entries) but I knew this might be the case -- this is why I only started with one unit. Gold continues to hold up well. It has received a lot of media attention recently and everyone seems to like gold, so that is not good from a contrarian standpoint. But I think being a contrarian is more important towards the end of cycles / trends when the consensus has been right for a long time and it cannot get beyond this -- like the case in equities currently. So I am staying long and looking for an opportunity to increase my position on further strength.

I am slightly concerned about the possible tracking error between the TSX and S&P500 indices. I think the present economic environment is more similar to the 1970s then the 1980s or 1990s (the comparisons people are always making). In the late 1970s the TSX performed very well due to the concentration of natural resource stocks, while the S&P went nowhere. If something similar happens again I could end up being right (in that the S&P500 performs poorly) but I lose money. Not the desired objective. I need to keep a close eye on this, and maybe consider diversifying into other short ETFs (e.g. SDS) even if it means taking on some currency risk.

One last point: I took a look at the start of the bear market in 2000 again to see how it played out and if I could relearn anything. One thing that struck me: even though the market peak was reached in March, it was not until late September / October that the S&P decisively moved lower -- 6 months later! In contrast, it has only been 6 weeks since the recent market peak in July. So I am going to wait at least until next week to see how things play out.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)

Patience is a virtue

2007-09-21T16:44:00.000+01:00

Patience is a virtue in trading. One needs to have patience when entering trades, and patience when exiting. I could do with more patience. I tend to rush into trades, then bail when they do not go my way immediately. I was reflecting on how many of my big ideas over the past 18 months (long DJIA in early '06, long China in mid '06, long gold in late '06, short equities in spring '07) I abondoned then subsequently performed well.

I also rushed to replace the one unit of HXD that I sold Wednesday. After holding it as it fell $5, I did not want to watch it recover. My stop-buy was filled yesterday at 20.65.

Relatively quiet day today. Equity market is up again erasing yesterday's losses. So I sit and practice being patient.

MARKET POSITION: EQUITIES - SHORT (4 units); GOLD - LONG (1 unit)

Unconvinced

2007-09-20T16:45:00.000+01:00

As I keep stating, I am unconvinced. Unconvinced that the credit crunch is over, unconvinced that the Fed lowering rates by 50 bps will solve the housing problem (which is at the root of the crisis), and unconvinced that the recent rally in the equity markets has legs. Perhaps I am stubborn, or wedded to my short position, but I don't think so. The more I think about it, the more unconvinced I become.

For risk management purposes, I entered 2 stop losses yesterday on my HXD position, for 1 unit at 19.90, and one unit at 19.80. The market gyrated between about 19.85 and 20.00 for the first 90 minutes. I thought I had outwaited the volatility, but not quite. My 19.90 stop was hit on the last move down through 19.90, then the stock subsequently rallied by about 50 cents (2nd stop was not hit).

Gold continued to rally so later in the day I placed a stop buy for one unit on HGU at 25.05 but this was not hit. Neither was my "re-enter" stop buy on one unit of HXD at 20.50.

Gold is through $730 today so I am a buyer of one unit of HGU at market (25.39). I also re-placed my re-entry stop buy for HXD at 20.65. CDN market continues to be quite weak and has fallen below my 13,900 upper target that I kept re-emphasising earlier this month. I think this may signal the final top of the rebound rally that began mid-August. Sentiment turned noticeably over-bullish after the Fed announcement. Most bears seemed to throw in the towel and assume risky assets were once again a safe bet. Reminds me of last June.

MARKET POSITION: SHORT EQUITIES (3 units); LONG GOLD (1 unit)

So Who's Right?

2007-09-19T13:49:00.000+01:00

So who's right? The stock market or the Fed? The Fed cut rates by 50 bps yesterday due to concerns the recent credit crunch would adversly impact the real economy, and the stock market jumps over 2%. Does the stock market think that easy money is about to return? Or that inflation will be good for firm's pricing power? Or was it just caught up in the moment, and reality will soon bring it back to earth?

Either way, my upward bound for the TSX was breached yesterday, so I must seriously consider reducing my short position. However, as I have been burned many times entering and liquidating positions near turning points, I plan to wait until at least one hour after the open today to decide. Housing starts this morning were down more than estimates, and Morgan Stanley reported a 17% fall in earnings due to the credit crunch. Maybe these might remind investors what's really going on.

I also wish to establish an initial position in gold through HGU. Gold has gained strongly since I first mentioned it about a week ago. If the stock is up strongly more than one hour into trading, I will probably take a small position. I am slightly concerned about a small correction after the large gains of the past month, so I plan to enter this trade gradually.

MARKET POSITION: SHORT (4 units)

Testing Times

2007-09-13T20:48:00.000+01:00

These are certainly testing times for anyone on the short side, such as myself. I think a lot of shorts have been shaken out over the past 2 weeks. I have held on due to my firm beliefs in the fundamentals, but good risk management practices dictate that I should consider reducing my position if the markets continue to rise from here. My sense is that we are probably near the end of this rebound rally, but I said that last week too. But rallies and declines usually end with a bang (I certainly re-learned that lesson when I sold additional units at almost the bottom of August's decline), and today's sharp rally certainly has that feel to it. I have continually said that my target range for the TSX rebound was 13,550 - 13,900. Today we reached 13,895.

Tomorrow will be a major test. Retail sales data for August will give a hint as to whether the American consumer still has some spending power up his/her sleeve, and whether people were spooked at all by the credit turmoil.

MARKET POSITION: SHORT (4 units)

Short Side Lining Up Nicely

2007-09-09T16:31:00.000+01:00

The TSX appears to have spent the past four days forming a top to its pullback and the short side is now lining up nicely. Last week I mentioned that my level of uncertainty seemed greater than usual but I can safely say that I no longer feel that way. I would cite the following five factors:

1) Economy: last Friday's NFP report confirms what I have been saying for a while -- the economy is weak. The US housing market is very slowly falling off the edge of a cliff, and this will have major implications for households and the financial sector. The odds of a recession are now high -- certainly above 50%. Hell, there may be a recession underway already. A cut in the Fed Funds is now gauranteed, but as I said last week, it will be too late.
2) Market Sentiment: has shifted from overconfidence to hope. Everyone is now hoping that the Fed will save the market and the economy. That is the classic sign of the early stages of a bear market. Nevertheless, the bears remain wary. They are scared that the Fed will cut and the market will rally strongly. My investigations (admittedly anecdotal) are that there are not a lot of net shorts out there. That is a good sign from a contrarian perspective.
3) Financial Flows: The first week back after the summer was not good from a financial flow perspective. It seems that few deals were done. Everyone is edgy, and investors are not committing new money. The M&A market is quiet. Banks are stuck with lots of PE loans that they cannot unload and will have to carry on their balance sheets. LIBOR is ticking up as the financial system is icing over, despite all the money injected by central banks
4) Treasuries: Treasuries are rallying strongly. I was worried last week that the longer end of the curve was not coming down. Since then, the US 10 year yield has fallen by 15 bps. Impressive.
5) Gold: Over the past 8 months or so, gold has been stuck in a band between about $640 and $700. In general, it fell when risky assets fell, as investors treated it like other risky assets. But over the past couple of weeks, gold has increased sharply, and it breached $700 last Friday. And this despite the fact that the economy appears weak and commodities are not very strong, so inflation should not be a big concern. This may indicate that investors are becoming worried about the US financial system, and believe that the Fed is going to have to create LOTS of money to bail it out, putting more downward pressure on the USD.

If the market continues to fall I may add to my short position in the near future, keeping in mind rule #2. I will also considering taking a long position in gold, using the Horizons Betapro Gold Bull fund (HGU).

MARKET POSTIION: SHORT (4 units)

Fed Shmed

2007-09-04T11:06:00.000+01:00

A couple of weeks ago I speculated that we may come to a point where the Fed cuts rates but then the market realises that the economic outlook is poor, leading to further market declines. The probability of this scenario occurring appears to be rising. The Fed looks like it will cut later this month but it will cut because it is concerned about the economy, not because it wants to prop up asset prices. In fact, from the snippets of Bernanke’s speech I have read, the Fed is becoming very concerned about the economy. It realises that falling housing prices will probably impact consumer spending. It also realises that credit conditions are tightening, and lower interest rates are needed to neutralise that impact, and possibly reverse it.

But all of this does not really matter. Why? Because the Fed is behind the curve. If there is going to be a recession later this year, or early next year, the Fed is already too late. Monetary policy operates with long and variable lags. All the Fed can do is try to ensure that any upcoming recession is not too long or too severe. I think the Fed knows this too.

MARKET POSITION: SHORT (4 units)

Conflicting Signals

2007-08-30T16:12:00.000+01:00

Of course, there are almost always conflicting signals in trading -- that's why it is so difficult to do it successfully. But it seems that the signals are more conflicting than usual now. On the negative side are all the economic fundamantals that I have mentioned many times since starting this journal, so I will not repeat them here. On the positive side are several more ephemeral factors: 1) the yield curve has moved from flat/slightly inverted to upward sloping. This usually foreshadows stronger economic growth. 2) Sentiment seems to be midly bearish (though not overwhelmingly so). Its tough to know how many others out there are net shorts, but I certainly don't get the impression either that everyone is heavily long either. 3) Ed Hyman of ISI is calling for higher stock prices, based on moderate GDP growth (no recession) and falling interest rates. Ed is a highly respected economist and knows his stuff. But I wonder if the corporate connnections he usually relies on to guage the economy are poorly suited to predicting a consumer spending induced slowdown.

Despite yesterday's rally, the TSX still remains below my target up-bounce range of 13,550 to 13,900. So I would not be surprised to see some additional upside from here. But as I keep mentioning, it is important to stay on one's toes and not get wedded to one side or the other.

MARKET POSITION: SHORT (4 units)

Massing in the wings

2007-08-28T14:20:00.000+01:00

I get the feeling that there are a large number of investors massing in the wings, waiting to buy the next dip. Everyone seems to know that the fundamentals warrant more pain, but they do not believe (or do not want to believe) that the bull market may be over. The US economy will soldier on.

I have trouble with this version of events. I do not see how the unraveling of what was probably the greatest bubble in American history --yes, far greater than the tech bubble of the 1990s -- can not have serious negative implications for consumption, and therefore the economy. Toll Brothers' recent conference call highlighted how bad things really are, and the economy probably has not hit bottom. If no one wants to buy a house now, what about when people really start to lose their jobs?

Many people in the investment community have pointed out that investors probably overestimate the impact of Wall St. events on Main St. This is probably true. But they are also underestimating the impact of Main St. on Wall St.

The market appears to be rolling over and it will probably re-test the recent lows. As of now, my positions are showing losses so I will not be adding to them. However, the TSX remains below my upper risk level of 13,900 so I will also not be reducing my position. It is a case of sitting tight and waiting to be proved right (or wrong, as the case may be).

MARKET POSITION: SHORT (4 units)

Profiting from the long-term increase in food prices

2007-08-24T15:16:00.000+01:00

A few well-known, savvy, long-term strategic investors have mentioned farmland as a good investment. I assume this is a play on food prices. As far as I know (I admit I need to do some research on this), food prices have been falling in real terms since the advent of the green revolution in the 1960s. Improved chemicals, fertilisers, seeds and machinery have all kept food prices down. Most farmers are still notoriously poor.

However, there seems to be several forces now working against this trend, including: 1) population growth. Although the growth rate is declining, the earth is still expected to add about another 3 billions inhabitans over the next 40-odd years. That is a lot of mouths to feed. 2) There are diminishing returns to the above inputs. 3) Lack of land and water. Growing populations, desertification, falling water tables, disappearing rivers, etc. are all placing pressure on marginal farmland. 4) Climate change. This may open up new farmland in Canada and Russia but my guess is that more fertile land will be lost in the warmer climes than gained in the north.

There have been many stories on increasing food prices over the past 6 months or so. With all of the above factors working together, this could be the start of a long-term, structural increase in food prices around the world. The proportion of total household spending on food has been on a long-term decline, especially if you strip out the increasing spending at restaurants. The proportion should climb back up.

So, how to profit from this trend? Farmland is difficult to purchase for a small-time investor. Too much money, too much hassle, little diversification. My big idea: if food prices increases, farm incomes should also increase. This should translate into higher capital expenditures by farmers, ergo companies that manufacture farm equipment should also prosper.

A brief investigation shows that the largest farm equipment manufacturers are: John Deere (DE), CNH Global (CNH), Kubota (KUB) and Agco (AG). I would like to purchase a broad basket of shares to reduce company-specific risk, plus this is not supposed to be a stock-picking exercise. However, DE, CNH and KUB are also exposed to the construction equipment industry, making them less of a pure play. Whether this will be a help or hindrance over the long-term is tough to say. The slowdown in global economic growth may hurt, but the global infrastructure construction boom is probably still in its early stages.

I will return to this topic in the near future.

Let me take that back

2007-08-24T14:01:00.001+01:00

In yesterday's post, I said that investors were starting to hope that the worst is over. I think traders / investors are starting to fear that the worst is over. The smart money seems to think that, although things are fine medium-term, we are due for some more short-term pain. In Macro Man's lingo, this is the "W" correction. There will be another leg down, and it should be bought. But investors are worried there may not be another leg down, and so they are trying to decide if they should jump back in or wait.

It is tough to know how to play this knowledge. I am a contrarian by nature, which gives two possible options: 1) there will not be another leg down, and this rally should be bought, or 2) the next leg down should be sold.

The fundamentals (as discussed in past posts) point towards option (2), and the fundamentals should rarely be ignored. But, as always, it is important to remain aware that I might be wrong, and I may need to change my mind. For now, the TSX is below the target range for the upward retracement, and I will watch and wait.

MARKET POSITION: SHORT (4 units)

Wait for it...

2007-08-23T15:28:00.000+01:00

The upward bounce continues and investors are starting to hope that the worst is over. I am having trouble believing that everyone could have gotten off so lightly. Sure, the credit markets took it on the chin, and some hedge funds blew up. But given the scale of the sub-prime problem, the amount of leverage in the system, the level of take-no-prisoners risk-taking, it seems naieve to think that the whole problem would be solved by some minor Fed easing and limited asset transfers. The equity markets were down about 10% from their peaks -- hardly a crisis!

The TSX is still below its target "up-bounce" range (TSX currently at about 13,400, target range 13,550 - 13,900). So it would not be unreasonable to expect some more upside. But it is times like these a trader needs to stay vigilant and ready to change his mind if he is proved wrong. If the TSX moves above 13,900 I will be forced to reduce my short position.

MARKET POSITION: SHORT (4 units)

Bounce Begins

2007-08-20T13:15:00.000+01:00

Asian and European markets higher after the Fed's 'surprise' (depending on whom one speaks to) cut in the discount rate Friday. Yen is lower and the usual carry-trade suspects (NZD, AUD, etc) are higher. It seems that some calm has returned and traders/investors are tentatively taking some risk.

However, the reduction in the discount rate does not change the fundamentals. Monetary policy in the US remains tight given the economic situation. I think the markets are starting to realise that all is not as rosy on Main St. as the bulls/economists would have us believe.

There is speculation whether the reduction in the discount rate is a signal that the Fed will cut at its next meeting, or whether it was merely a sop to the markets to try to calm the situation. I don't think the Fed knows for certain what it will do at the next meeting. If markets continue to fall and the situation morphs into a true crisis, the Fed will probably cut. But if markets recover, the Fed will probably not. The strange logic is that the market is more likely to rally if it thinks that the Fed is going to cut....you can run yourself in circles here.

When the Fed finally does cut, it will probably be greeted with great joy. But as the markets see that it is having limited effect on the real economy, they will dispair. The first cuts never seem to have any impact, just as the first increases never seem to have any impact.

MARKET POSITION: SHORT (4 units)

Guess who's back from holidays?

2007-08-17T11:03:00.000+01:00

A few of the Dipbuyers returned from summer holidays yesterday, and immediately got to work trying to re-start the party. The music was started, some other guests came back, and they even danced for a few hours. The problem is that the booze (AKA credit) is all gone, and all of the stores (AKA banks) are closed for the night. Thus it seems that the party is unlikely to last.

Indeed, despite the dramatic recovery in NY yesterday, Asian markets tumbled pretty strongly overnight. The Nikkei fell over 5%, to a level that was last seen 12 months ago. European markets are currently giving up early gains. Currency markets remain volatile (the Yen is jumping around like a kangaroo). Given how long the liquidity lasted, there must be a lot of traders / funds out there hoping (please) that they are not forced to exit positions at severe losses. The pain is getting bad, but I don't think we are there just yet. Usually markets go vertical when they are near turning points, both on the upside and downside.

Looking out a few weeks / months, the big question is whether this is just a credit crunch, or something worse. The general opinion seems to be that this is like 1998 -- we just need liquidity conditions to return to normal (preferably with a little help from the Fed), and everything will be fine i.e. the bull run can resume. The major problem with this theory is that it ignores the fact that there is also a severe housing market downturn going on at the same time. This could continue for another 12 months, maybe longer. Manufacturing is also weak. This has already placed a lot of pressure on consumer spending, one of the major drivers of economic growth the past 5 years. Banks are also tightening lending and this will not help the situation. Thus we could have a situation where the market is "saved" by Fed easing, but then belatedly realises that the economy is in pretty bad shape.

Looking at yesterday's trade in retrospect, the timing was poor, and it cost me money. The trade was definitely impetuous, and perhaps I need to consider introducing some sort of "cooling off" policy whereby I must wait an hour or two following the decision to trade. This would allow the circumstances to be evaluated in a calmer manner.

MARKET POSITION: SHORT (4 units)

The great shakedown

2007-08-16T17:38:00.000+01:00

Markets declining sharply again today. I bought 2 more units of HXD at 24.85. I was a bit impatient and rushed the trade -- it traded down to as low as 24.11 shortly afterwards. But now it is around 25.00.

Starting to see some signs of capitulation out there. US 10 year broke throught its resistence around 4.70 and is now trading around 4.63. Yen is down more than another point to 113. I think a lot of people are getting shaken out of dodgy, overleveraged trades.

MARKET POSITION: SHORT (4 units)

Watching the dominoes fall

2007-08-16T12:16:00.000+01:00

Contagion is a good word to describe current events. Dominoes keep falling in the great contraction of global liquidity. Investors/traders are bailing out of positions because they are losing money in one market or another, and are trying to curb losses / reduce risk. Banks are severely reducing their lending to funds and forcing funds to mark-to-market collateral. The most recent victim is the global carry trade (mentioned yesterday). Today we see the Yen up significantly while the AUD and NZD are down 3-4 cents in ONE DAY. Emerging markets are starting to feel heat; yields on gov. bonds such as Hungary and Turkey are rising.

There seems to be no turning back now. This will get worse. Selling is begetting more selling. The fundamental problem is that there is such a large amount of leverage in the financial system at present. Everyone is playing with borrowed money. The most likely scenario is that this will continue for a while, then the central banks will be forced to step in. The central banks do not want to bail everyone out -- they are concerned about moral hazard, certainly. But they also do not want this to spread to the real economy. Most importantly, perhaps, they do not want this to cause a collapse of the banking system. Bernanke is, after all, the expert on the Great Depression.

I am seriously considering adding to the short position sometime today.

MARKET POSITION: SHORT (2 units)

More damage needed?

2007-08-15T09:24:00.000+01:00

Looks like my call on a short-term bottom was a little pre-mature. We continue to witness a very large reduction in risk/leverage. Asian markets fell sharply again last night. Nikkei closed below its March low, which is bearish. Europe down - FTSE is approaching March lows, though DAX remains far above. The USD is strengthening against the Euro and C$. The Yen is up sharply the past few days while the NZD is down, indicating that the global carry-trade is unwinding.

It's tough to make a short-term call here. The declines over the past few days were large, and a technical bounce would be normal. At the same time, the negative news is starting to become overwhelming. The Bulls' rhetoric seems to be waning. The mainstream media is starting to discuss the possibility of a recession. Wal-Mart (the US and world's #1 retailer) went out of its way yesterday to highlight the difficult economic environment.

There has also been a lot of talk about the Aug. 15 deadline for redemption requests at hedge funds (given a 45 days to quarter-end notice period). Many investors at losing funds are likely to throw in the towel and ask for their money back. This would prompt more de-leveraging / selling. There has been a massive move into quantitative trading / investing over the past few years. For a while, it must have seemed like free money. But as with all great things in the markets, it cannot last. Goldman is unlikely to support ALL of its hedge funds.

Medium-term trend remains down based on poor economic outlook and negative sentiment / technicals.

MARKET POSITION: SHORT (2 units)

Short-term bottom forming?

2007-08-14T10:23:00.000+01:00

Yesterday's rally did not turn out as well as expected. After opening up, N. American markets drifted downwards all day, culminating with a sharp slide that caused a negative return by end-of-day. Asian markets were mixed overnight. Europe opened down but has been rallying this morning. Perhaps we may be working through the sellers and forming a short-term bottom. Again, I do not expect it to last. Despite all the rhetoric coming out of the traditional bullish camps, I don't get the impression that everyone is waiting to jump back in with two feet and increase risk/leverage. The opposite, in fact -- people seem wary. And how long are investors going to tolerate large losses from these funds before they bail-out?

A recent report by Lehman Brothers on the quant-fund massacre last week http://www.dealbreaker.com/images/pdf/quant.pdf provides a few interesting lessons:

1) Language it important: your model did not blow up, it "misbehaved"
2) Turns out everyone is running the same model (more or less). Oops! How did that happen? (hint: everyone is using the same dataset and techniques to build their models)
3) The market has acted in unexpected ways. Funny that -- I always thought the market was predictable, as long as your computer programme was big enough
4) When things go really wrong, blame the asset class, not the manager!

MARKET POSITION: SHORT (2 UNITS)

Whew! Am I glad that's over....

2007-08-13T10:56:00.000+01:00

Asian and European markets up this morning, some very strongly. I am assuming that this is a "relief" rally, as in "Whew! Am I glad that's over..." Uncertain how long this rally will last, but I guess anywhere from 2-6 days. As mentioned last week, the economic fundamentals do not look good (in the US - globally it looks OK for now). The liquidity tap, if not off, is down to a trickle, and this should prevent any meaningful rally in the markets. That is what makes this "correction" different from the past few. People were frightened. It seems unlikely that hedge funds will be wanting to increase leverage again quickly, and private equity firms will probably be wary of big new deals in this environment. Similarly, I don't see the banks lining up to throw money at these guys like they did only a few months ago.

The "crash" is probably over, however, I do expect this market to gradually grind lower for the next several months, at a minimum, maybe longer.

MARKET POSITION: SHORT (2 units)

Knowledge & Confidence

2007-08-12T12:30:00.000+01:00

My suspicion was 'correct' -- NY and Toronto rallied throughout the day yesterday after opening sharply down. In the end, TSX closed down only a few points, while SPX closed flat. Short covering was probably a factor, but two other factors may also have played a role: 1) there seems to be a growing sense that the world is not coming to an end (despite all the crazy talk on Thursday). Maybe all the money the global central banks pushed into the system is having a soothing effect. 2) There has been a lot of speculation that all the quant traders are running the same models (more or less), and as the credit markets crashed they have been forced to reduce risk/leverage wherever possible. This probably has some truth to it -- how many different strategies (real differences, not superficial) can be employed with the same backward-looking dataset? Anyways, perhaps this selling has come to a halt, at least temporarily.

This sets us up for the rally to continue into the first half of this week. However, it seems unlikely to last. Economic fundamentals are still poor. Central banks may be willing to provide emergency liquidity, but I doubt they are willing to cut rates to save the credit markets. Things would have to get REALLY bad before that happened e.g. equity markets down 20-30% in a very short time period. At this point they could justify the cut to themselves by pointing to the likely effects on the real economy.

After reading more of "The Black Swan" over the past few days, I am reminded of the dangers surrounding knowledge and confidence. It is probably impossible to consistently forecast the markets, especially the short-term day-to-day movements. Anyone who claims they can do so is either lying, lucky, or, most likely, never checks their own record.

It is important to keep the limitations of one's knowledge in check and not become overconfident. In the markets, being over-confident is worse than being stupid.

MARKET POSITION: SHORT (2 units)

Initial Thoughts

2007-08-10T09:05:00.000+01:00

Trading started several months ago but, for some reason (?), I did not start the journal until today.

Coming back from holidays on Monday 6 August (4 days ago), I had the strong feeling that the markets were ready for a technical bounce. In fact, I had tried to buy HXU at the last moment last Friday afternoon, but was too late in entering the order by a few seconds. Toronto was closed Monday but NY rallied. On Tuesday at the opening, I was surprised to find Toronto trading flat from Friday's close. Being quite certain that the markets would rally following the Fed statement later (no matter what they said -- any old excuse would do), I bought HXU at 28.37. Stop loss was set at 27.95. I thought there might be a dip before or after the statement, but thought the spread would be sufficient to take account of any market 'noise'.

I was away from the computer from before the Fed announcement until after the close. I was slightly annoyed by the outcome. Markets did indeed rally, and there was a dip first. But the dip was large, and my stop loss was hit. In fact, my stop loss was hit at 27.88, and the low was 27.83. Close was 28.60. There must be a lesson to be learnt there, but I am not really sure what it is. For now, I am taking it to be: "be sure in your trades and set stop losses wide". If you are not sure, then don't trade!

Wednesday: market rallied again but I decided to stand on the sidelines. I did not expect the rally to last very long -- this was a technical bounce, after all, so it was a matter of waiting for it to peter out.

Thursday: European markets tank after more bad news on sub-prime. Turns out the problem is spreading to Europe. Amazing where this junk is turning up. In retrospect, not too surprising though. Considering that China, Japan, India, Russia, Saudia Arabia, etc. have been buying all the US Treasuries over the past few years, what has everyone else been buying? Securitised and structured products. And why not? They have a AAA rating, and the yields are certainly better. But ratings do not say anything about liquidity risk. And right now, it seems that no one wants anything without a government name. The technical bounce is over.

Toronto gaps sharply lower at the open and I am a buyer of HXD at 21.78 (no stops set after Tuesday's experience...for now). Market subsequently rallies for the next few hours. I know this cannot last, but I am annoyed at my impatience. I could have entered the trade at a much better price. Try to tell myself that it is the big moves that matter, not the intraday. In the end, market gives up all its gains and more.

Friday (am: London): Asia down sharply overnight. Nikkei is down a lot but the March lows held (so far). Europe also down. US$ up. Everyone is worried. Apparently the central banks are injecting liquidity into the markets. But I have a strong feeling it won't be enough to prevent a bear market. It may prevent a seizure of the credit markets, but the damage to the American household has already been done. People are worried about their homes and jobs. Spending will slow, dragging the economy down with it. In the financial markets, the global buyout binge is finished. finito. This has been driving the market up for the past 6 months, and now it is gone.

This all said, I have a sneaking suspicion there will be some short covering today before the weekend. The selling will continue next week.

MARKET POSTIION: SHORT (2 units)