Double Journey

So I did a quick inventory of my assets this weekend.  As I’ve written in this blog before, I’m very heavily weighted toward cash right now.  I stopped buying stocks about a year ago because I was sure the market was overpriced and did not want to buy at the top of the market.  I’m looking like a genius right about now with that call.

However, I’m now way too overweight in cash at this point.  If you add up all my non-retirement assets, I’m about  77% in cash and the rest in equities (I don’t own any bonds or bond funds). For someone my age, this is a pretty silly to be this far into cash, even if you are as bearish as I am.  I am still not ready to jump totally into this market, I do think there is probably some more room to the downside, but I definitely should not have this much cash on hand.  Some of this has been caused by the shrinking value of my equity portfolio.  I’m probably down at least 40% over the last year or two.  But most of it is simply staying on the sidelines and continuously earning more money which just turns into cash in my savings account.  Yes I know, its a nice problem to have.

So I need to start looking very hard at my shopping list.   There are some things that are extremely interesting to me at the current prices.  There are some things that are extremely scary too.  For example.  Goldman Sachs.  I thought it was a buy if it were to ever hit $120, and now that stock is trading close to $60.  Was I right before, or is this stock going down even more?  In this market, it is extremely hard to say.  That’s why I won’t deploy all that cash, probably just a third of it over the next few weeks.  If the market becomes more stable, I might look to divest another third of the cash.  Not sure if I will deploy that last third anytime soon unless I really think the market gets into bull mode, which I honestly don’t see happening in the next few years.

So what is the first thing I should buy?  So hard to make a decision right now …
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I really hate Hank Paulson.  I seriously think this guy is either evil or completely inept.  Just a little over a month ago, the bailout package was announced.  Not even two weeks after he was able to trick everyone into giving him almost unlimited control over a vast amount of money, he announced he was changing tactics and going a different way.  Instead of buying all the assets of banks, they would inject new capital into banks by taking an equity.  Well today he also announced a change to the plan.  Instead of focusing on the banks, he will use the money to focus on other financial institutions that extend credit to consumers. Does anyone actually think the government knows what it is doing?  Is it any wonder why I hate government plans as much as I do?

The market promptly dropped testing the lows of the market.  The S&P is now close to the lows we saw on October 10th.  That day, the market reached a low of 839.  The market closed today at 852, leaving it just  1.5% away from the low.  If the market is able to break through that, we have a very scary situation.  The problem becomes that in bear markets, you continue to go down if you create new lows.  The reverse of this is true, in bull markets you keep making new highs.  Considering the S&P is already 42% down, thinking it can go down more is pretty painful.

I honestly think we will break through that low.  After the market close, Intel announced that it had a very bad quarter, and the market is for sure going to open down.   Unfortunately for me, I closed out my short position today.  I had made a 15% profit in that position in a little over four trading days, it was a pretty good trade for me.  However, I did not want to be greedy, and decided to get out even though I was pretty sure the market was going to go down from there.  This market is hard, and anytime you can take a quick 15%, you take it and don’t look back.  I don’t feel bad about covering, it was the right move, but now I have no downside protection.  If the market tanks, my portfolio will go with it since I no longer have a hedge.  So I’m a little worried about what will happen in the next few days.

Every time Hank Paulson, or anyone from the government for that matter, opens his mouth, the market does crazy things.  Just please stop talking.  While you are at it, please stop doing anything.  The more you do, the worse things get.
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I woke up to find that the market is rallying because we lost only 240,000 jobs in the month of October.  The market reacted by going up 200 points in the Dow.

240,000 jobs is an awful number.  6.5% unemployment is high when compared to where we have been in the last decade.  There are now 10 million people who are considered unemployed.  This is the same number of people in the state of Michigan.  The scary part, it really is going to get worse.  Like I said in my last post, there are more and more employers announcing layoffs.  So this will easily get worse before it gets better. I don’t expect depression like numbers, but I do expect unemployment to continue to rise through the end of the year.

The play here, fade the rally.  For those who don’t understand it, it basically means you should start selling your stock into rallies because the general direction is down.  You are getting a short term bounce, so you should use it to your advantage.  There is one caveat here.  I think the market could easily rally depending what comes out of Obama’s economic summit.  If he came out and gave news that was very investor friendly, like he would extend the capital gains rate past the 2010 expiration, I can see the market having a violent rally upwards.  These types of moves are why most investors should stay out of this market.  It just isn’t a market that amateurs should be messing around with.
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As the Market rallied somewhere around 18% this past week, I held on to my short position.  I had no doubt in my mind that the market would eventually reverse and have a violent move down.  That’s what we have seen in the last two days with the market down over 10%.  Do people really understand how crazy this is?  You usually don’t get double digit moves in a year.  We are seeing them regularly over days.  The thing is, the market is going to go down from here, so I will continue to hold on to my short position for at least a few more percentage points.

I’m very short term bearish on this market.  If you can hold on to stocks for years, it might be a good time to buy, but the news coming out is consistently bad.  Earnings are bad at almost every company reporting, layoffs are being announced almost hourly, and the governmetn can’t seem to get anything right.  I find it very hard to believe that any of the professional investors out there are going to put much capital in the market until at least the beginning of the year.  Most if not all will attempt to liquidate any positions they have remaining on every market rally.

So here is the recipe that I’m using.  When the S&P drops to around 880, you want to be out of any short position.  If you are brave, you might want to go long at this point.  When the S&P gets to around 950 its time to short.  You play this range, and be disciplined, and you will probably do just fine.  If you are smarter, you just stay out all together.
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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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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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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 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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Wow, this market is getting ugly isn’t it?  Just when you thought it couldn’t get any worse, it did.  Seven straight days down.  Not just down, but huge moves down.  After the bailout, the market is down over 20% from a week ago.  Doesn’t look like the bailout plan created much confidence in the market does it?  Are we done yet?  Probably not.  I can easily see the market going under 8000 and probably even 7500.  From the market peak, the market is down almost 40%.  That is a pretty scary number if you think about it.  To give some perspective, here are the declines of some of the major bear markets

• Tech bubble burst- 34% (Over a 2 year period)
• 1987 Black Monday - 23%
• 1970 Stock Market Crash - 45%
• 1929 Crash, The Great Depression - 89%

So, while we aren’t in the worse crash of all time (not even close) we are in one of the worse crashes in recent history.  If the market goes down another 5%, which it could easily do in a day, we could easily be in the worse corrections we have ever seen. Is this justified?  It is really hard to say.  I find it hard to believe we can drop past 50% but I also have to admit that we are in unprecedented times.  I am getting my shopping list ready, and looking for a way in.  I won’t be blogging tomorrow, it is the girfriends birthday and we are going away for the weekend, but I will be thinking hard about what I want to own.

I think you need to stat looking to buy.  I had no interest in buying for several more months, but I seriously did not expect the market to go this far down this fast.  I still am mostly in cash, at least 70%.  That’s partly because my equity portfolio is so far down this year :)  But seriously, you want to buy the companies that are going to make it through this mess.  These are companies with

• Strong balance sheets with very little debt
• Strong cash flow
• Can grow by avoiding using debt and funding it with cash on hand
• Globally diversified
• In economic insensitive markets

As crazy as it sounds, I’m also interested in banks.  The sector is getting destroyed, and clear winners are going to emerge.  You add this to the fact that the government is making it EXTREMELY profitable to be a bank these days, and you have a recipe for some very big winners in the future.

So what are you doing in this market? Staying on the sidelines, losing your shirt, or feeling like a kid in a candy store?
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I did the classically wrong thing and I will now continue to do it.  I turned a trade into an investment.  As I’ve written in  my previous post, I decided to go long the market, and specifically the financial, expecting their to be a bounce.  No such bounce has shown up and I never closed out my positions.  This has put me in a precarious position of either taking a loss, which would be substantial at this point, or holding on to it for the longer term.

Here is the thing, both of them are essentially indexes.  Both of them will eventually recover, I have no doubt about that.  The problem becomes, how far can you go down before it gets too painful? Lucky for me, I tend to have a very high pain threshold.  Too high actually, so long as I don’t watch the stock everyday.  I’ve taken a few stocks all the way down 90%, which is a complete mistake.  You should have a tight stop on individual stocks, and know when to get out.

So I will, for now, sit and wait for the eventual and violent trend up.  It will happen, of that I have little doubt.  I’m not saying I’m long term bullish on the market right now, but I am short term.  After this much selling, there is almost always a bounce.
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