Double Journey

I hate the Fed now.  It is ridiculous to think that a group of men think they are capable of picking an appropriate interest rate.  I could go on and on about all the things I hate about this, but it would just end up making me more upset.

I played this pretty well.  I followed the mantra of “buy on the rumor, sell on the news”.  It was widely rumored that the fed would cut the interest rate.  I was sure the fed wouldn’t disappoint and do the wrong thing.  I was still partially in my long position in the S&P, so I was looking for the right time to get out.  I decided the best time would be just a few minutes before the Fed announced because I figured there was probably only downside after the cut was actually announced since it was so widely believed that it would happen.

Now I would love to get short the market again.  I fully expect another leg down despite what the Fed is trying to do.  I really want to start looking at the banks right about now.  Seriously, as bad as these may look right now, the government is going out of its way to make sure banks are really profitable going forward.  They are literally giving them money, making money cheap for them to borrow, and essentially backstopping them to make sure they don’t go bankrupt.  When you add the fact that competition will be much less going forward, because so many banks are getting taken out, and you have it set up to be a great year next year for banks.
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The market is doing what I expected it to do.  The market is trading in a fairly large range up and down.  The top of the range is around 9300 on the Dow and probably 8000 on the down side.  What I’ve been trying to do is trade the range.  I’ve met with some success although I haven’t been able to hit the extremes very well.  I own the SSO which was up about 22% today.  That’s a crazy number for one day.  As this stock  skyrocketed up, I took some off the table.  That is, I sold some even though I believed the market was still going to go up.  Why did I do this?  Don’t be greedy.  In comparison to the day before, I had made a lot of money so I sold some of my position in case the market comes back the other way.

What I would like to see is the market go up early in the morning and test the Dow around the 9300 level or the S&P around the 980 level.   If this happens, I’m going to sell the rest of my SSO position, and again look to take the other side using SDS.  I don’t think that this pattern can last forever but I’m willing to play it until it doesn’t work anymore.

This move up is a bad thing.  I know we get excited with market rallies, but double digit moves in the market are not natural.  They are only caused by fear.  There was too much fear on the way down and there is too much fear here that people will miss the rally.  Stay out if you can, because this market will head down again.
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It is rumored that the Fed is considering lowering the Fed funds rate below 1%.  Really?

If you remember my post about what caused this financial crisis you will remember that one of the main factors was the cheap money the Fed flooded the world with shortly after 9/11.   Did we really learn nothing from the last time?  Do these people really think that even though we got here by making available cheap money, we can fix it by making money even cheaper than we did before?

I wasn’t sure about it before, but I’m very sure now, we have got to change the mandate of the Federal Reserve.  They should not be trying to manage the economy because they will screw it up.  Look at what Alan Greenspan just admitted, he didn’t know what they hell he was doing.   Giving anyone the power to manipulate interest rates and the money supply is just wrong.  Now people will look at the failure of his policies and conclude that the free market doesn’t work.  Of course this is very flawed thinking because the fact remains we never had free markets and still don’t today.

The Fed should get back to what it needs to do which is to make regulations that enable better transparency and accountability in the markets and then ENFORCE it.  If they would have done that job, rather than continually worrying about where the Fed Funds rate needs to be, we seriously might not have gotten into this mess.  If they simply did this, three out of the four causes in this financial crisis probably never happen.

But I’m sure that won’t happen.  I’m sure Bernanke and the rest of the Fed thinks it can out think the markets, even though time and again, they have shown that they can’t.  They will keep doing what they think they need to do, even though it was already proved that they don’t know what the hell they are doing.

So I’m still long the market right now, even if I don’t want to be.  If the market gaps much lower, I will probably try and get out even though I still believe the short term direction of the market is up.  Our government will do something to make sure that happens, even if it is a bad long term deal.
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I was watching CNBC with someone at lunch today.  He is not that familiar with how markets work, and I was explaining to him how I was playing the abnormal volatility we are seeing these days.  No sooner had I explained this did we see the Dow Jones go swing 100 points up and then 100 points down.  Literally in a matter of about 3 minutes.  After the 100 down, it came roaring back and ended up almost 300 points from that level.  And all it took were 20 minutes.  That’s just nuts.  He remarked that watching it was more exciting than watching the baseball playoffs.  In some regards, he is totally right.

So how am I playing?  Today, I sold off my short position, SDS.  I bought it at 97 and sold it at 106.2.  So I got a quick 10% profit.  I was debating on whether I should hold on to it or not.  But then my coworker gave me some sage advice, “Don’t be too greedy”.  He was right.  I have been saying I was going to sell when the S&P broke 900.  It had, and by a few percentage points, so I got out.  Of course no sooner did I get out did the stock go straight to 108 on its way to 112.  I felt a little twinge of regret, as it was about a $600 difference in a matter of an hour, but I still felt I did the right thing.  No need to be greedy, the stock could have easily gone the other way.  And ironically enough, it did, ending the day at 100.

As the market ran up, I played the other side of it.  So now I’m long the S&P index.  I’m very uncomfortable here, and would be happy to just get a few percentage points.  If I get a 2%-3% pop in the index, giving me a 4%-6% gain, I’ll head for the doors and reverse my position again.  I’m willing to take about a 10% loss on this, and then I’ll be out on the other end.
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Only a quick post.  This is a very very busy week for me, so I doubt I will write much this week other than to make quick post on my current thinking.

Right now, I’ve been waiting for the pullback I was sure was going to happen.  I think we have probably reached a bottom a week ago.  However, the market bounced hard back up, and I didn’t think it was the right time to buy either.  But now that the market pulled back a little bit, I will probably look to buy tomorrow so long as the market doesn’t do anything nuts tomorrow.

If I buy, I will buy Novartis and Diageo.   I want to be in the drug and consumer staple large cap space right now.  Things that should survive even in a down economy.   To hedge, I will short the S&P even more than I currently am.
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There is a Sprint/Nextel commercial that every time I see it bothers me.  The commercial shows a bunch of firemen, with Sprint/Nextel phones, running Congress.  They run through a bunch of things that normally are very contentious and complex.  They do all of this in just a matter of seconds due to the power of their phones.Now while I am no lover of government, I don't pretend that they don't have to wrestle with hard choices every day.  It is one of the things that I have to often get frustrated at work with.  People always want what is important to them but don't see the big picture or understand that we live in a world of limited resources.

Those that don't have to make the decisions feel like those of us that do have an easy job.  They believe that all we do is go to meetings, say yes to a few things, and then can spend the rest of the day playing golf.Sure, if there were unlimited resources things would be easy.  I mean, who wouldn't want a balanced budget, lower taxes, and better roads. But more often than not, you can't do everything that you want.   You have to make tradeoffs, and these are often painful.  Not only that, but you often have to make these decisions with imperfect information.

I've run into this several times lately at work.  People who should know better can't seem to make the hard tradeoffs that come with not being resourced correctly.  They somehow expect there to be the same amount of output with 20% less resources.  It just doesn't work that way.  I handle this simply.  I prioritize.  You should always have in your mind the correct prioritization of any item.  You work until you reach capacity, and you cut everything below that line.  If the people around you complain, you give them a simple choice.  Cut something off the current list, or fund more resources.  Just don't tell me to do more with less.

I have to get out of meeting hell.  This week has been an absolute nightmare.  I am easily spending 80% of my time in meetings this day.  Part of this I just can’t get out of.  I now directly manage ten people, each of which requires some amount of time.  I’m also responsible for resource planning for the division, and we are trying to plan for 2009 right now.  You add on top of that that I’m the person who knows the status of any technology project, and I see the inside of the meeting rooms more often then I see my own desk.

Today was especially bad.  It started at 9:00 with my 1 on 1 with the GM of the division.  I had a 30 minute window after that before my next meeting, just enough time for me to boot the computer, grab a cup of coffee, and get the e-mail started.  Notice I didn’t say read e-mail, I said I got Outlook started.  From there, I had one one hour window that wasn’t booked, and that was lunch.  No sooner did my 11:30 meeting end, did I get a call from someone who said I was needed in a lunch leadership meeting.  They suddenly realized that I need to be part of this commission and they were requesting my prescense.  Great.  It might have been OK since they provided lunch, but they served sandwiches, and I can almost never eat the sandwhiches they provide since I hate mayonaise.  After that, I had meetings till the end of the day.  So in all, I had 30 minutes in which I didn’t have a meeting.  When the hell am I supposed to do resource planning?

It actually gets worse tomorrow.  While I don’t have meetings every single minute of the day, I do have an 8:00 meeting.  How evil do you have to be to schedule an 8:00 meeting when the standard starting time is somewhere around 9:30?

Normally, I don’t like to make complaints like this, it is just part of the job.  But this is a little over the top.  Most of the time I recommend a few things to get out of meeting hell

• Block out your calendar and don’t let people add you to meetings in that time
• insist on understanding why you need to be at any meeting and reject those you don’t have to be in
• Ask the organizer what input he wants from you beforehand, and give it to him before the meeting
• Delegate your responsibility to someone else who will attend, and get the notes and action items late

Unfortunately for me, most of these things won’t work for me right now.  As awful as it is, I’m required at most of these meetings.  A lot of them are my 1 on 1’s with people and I insist that I make time for those.  Those that don’t fall in that category often fall into the strategy planning for the next year, things I not only need to be part of but want to be.    I guess there is always the weekend to actually get work done …
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Only a quick post.  Worked a long day and have to get up early in the morning for an early meeting.  Work is starting to be a little crazy with me doing the job of two people.

The hedge is doing exactly what it is supposed to, it is creating ballast for the rest of my portfolio.  I still lost money today, quite a bit actually, but I’m not nearly as worried about it as I would be otherwise because my short position is balancing everything just a little bit.  Considering that this is a short term trade for me, and my other positions are long term holds, then I’m not worried about it.

The market is pretty ugly though, and I expect us to test the lows of the market that we bounced back from.  I expect the Dow to go back down close to 8000.  I will probably start selling my short position in that case, and play the market the other way.  But it won’t be nearly as aggressive as my short position is/was because I think we could easily go below where we were last Friday.
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Today, it was announced that there was a change to the government bailout plan.  The new plan calls for the government to, instead of buying bad assets, to inject NEW capital into the banks by obtaining equity stakes in exchange for the money.

Now, while this plan is actually slightly better than the old one, it still is pretty bad and in fact maybe worse in the long run for the country.  Here is my big problem with the plan.  We live in a capitalistic society.  This is a good thing.  The cornerstone of any captialistic society is the banking system.  Banks are the ones with capital. They put the capital in Capitalism.  The antithesis of capitalism is government run enterprise, socialism.

Now while this plan doesn’t actually give control of the banking sector to the government, it is a step in that direction.  And all it takes is one little step, and another one, and before you know it we have government controlling that entire sector.  The plan is similar to the one Warren Buffet got earlier, just worse.  The hope is that this injection of money will spur banks to start the lending the is so important to the proper running of the economy.  But even if this plan succeeds in the short term, it has scary implications in the long term.

Government is notoriously inefficient.  It is scary to think that we would put the model of inefficiency over the very institutions that need to be the most efficient.  Banks need to base their decisions on profit motives.  However selfish and non-humanitarian that sounds, it is vital to the proper running of an economy.  Banks need to provide capital to those who will best deploy it.  Don’t believe me?  Look what caused this financial crisis.   The housing crisis was caused when GOVERNMENT decided that it was a good idea to start lending to people with poor credit histories and who could not afford their payments.

Now what will happen if we let government start having a say in who should get capital and who shouldn’t?  What happens the next time it is decided to help those who don’t deserve it.  Maybe it determines that the failing American car industry needs to be saved, and the banks should lend it money.  How can we prevent the people who run the banks not to curry to their employers and owners, the American government?  We can’t.  Nor can we prevent this from going past a “temporary” solution.  Too many times, “temporary” fixes become permanent.

I get their will be pain.  I get we might have a recession.  But really, should we be transferring taxpayer money to corporations that took huge risk and lost?  Does that seem fair?
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Today the market rallied.  And it rallied big.  This is not a time to get excited.  This was actually not a good thing.  I’ll explain in a minute, but let me get to what I did today.

I woke up to find that the market had rallied 5% up.  This was to be expected after a brutal week.  But the fact that it continued to hold up throughout the day was kind of surprising.  Too add to my skepticism, it was a bank holiday and volume (the number of shares being traded) was relatively light. So what did I do?  I sold at the end of the day.  I bought the Ultrashort S&P ETF, essentially betting that the market would go negative soon.  I bought the ETF right at the red arrow.  Notice how the market continued up (and thus my stock went down).  I actually ended up losing about 10% for the day on this stock.  The thing is, I’m fine with it.  Why?

I got into my position to essentially balance out the rest of the portfolio.  I’m long everywhere else, and thus when the market goes up or down, my whole portfolio goes with it.  I prefer not to have so much volatility.  Volatility makes people do stupid things.  So I decided to hedge the rest of my portfolio by going long here.  Now, if the market goes down, this position will act as ballast to the rest of my portfolio and I should be OK.  This is a peace of mind move to be frank, so losing money on it is no big deal.  The rest of my portfolio was up big today, so losing a little bit on this position is no big deal.  For anyone else who can’t take their eyes off the market, I recommend they do the exact same thing.

So back to my opening paragraph, why is it a bad thing that the market rallied this big this quick?  Fear.  There is still a great amount of fear in the market.  On the way down, fear drove people out of the market, causing huge down moves in the market.  Fear of missing the rally caused the market to rally up today and rally big.  It is hard to make any money in a market driven by fear.  It is bad for the economy when market makers are driven by fear.  So all this move shows me is that the market is still a pretty dangerous place to be.  All the more reason I’m OK, and actually feel pretty good, about my short position today.
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