I don't know how the smart fund managers are handling this exact situation, but I do follow a few that have called this entire situation to date. Soros is short T-Notes and long certain foreign stocks. Fleckenstein is short T-Notes, short tech and the market, and long gold. Another one or two I follow are primarily long gold after having closed out shorts (or in process of finishing up). It's said that more and more parties are wanting to take physical delivery of gold, so the price of gold is about to skyrocket.
I'd like to know what John Paulson is doing. He's the guy that made $3 TRILLION off the subprime collapse by buying credit default swaps.
Most of these guys are way early on these macro trades. Some are closing their shorts and starting to buy. I guess that means, maybe, that that's the play to make in another week or two or more. That short T-Notes trade is probably on the money but a bit early
Friday, October 10, 2008
Crash after Columbus Day?
I'm preparing for the financial (bond, stock, and commodities) markets to begin crashing on Tuesday, the day after Columbus Day. Why do I think this? Because as oversold as this market is, it's violated every oversold indicator to become even more oversold. Everything in the business world is seizing up due to the lock on credit. I tried rolling over some retirement money I have in a private placement, but the company's lender put a clamp on the preferred stock as collateral for the company to continue borrowing. Typically, there is a rally that begins prior to each presidential election.
How ironic it would be to doing our own "price discovery" the day after Columbus/Discoverer's Day. For a little less than the past two decades, the VIX volatility indicator has indicated a turning point upward whenever it reached the 55-60 range. It's been well into the 50 range for the past week and a half, 60+ for the past few days, and 70+ for the past couple of days. It didn't exist during the 1987 market crash but I've heard it would have been somewhere in the 150-170 range.
I also can't see how we've reached what's called "capitulation," where everyone throws in the towel in defeat. We need to close at or near the lows on one day, preferably with the so called "circuit breakers" being hit. I believe the current circuit breaker on the DJIA is a 1100 point drop in the market by 2:30p EST. We need to hit that circuit breaker, then close for the day on or near the lows. Then the crash needs to be on the first 2-3 pages of every news paper. The following day, the markets will trade to their lows for the first part of the day, and that's when the buying may (or may not) safely occur. It's possible we may even hit the 2,200 point drop circuit breaker. We haven't gotten to that point yet. There's fear in the market, but not the type of fear that is indicative of a crash. Look at various stock charts. Yes, stocks are down, but aside from financial- and commodity-related companies, there aren't many company's whose stock charts show their stock dropping off a cliff.
The alternative to a crash is even worse...it's that Chinese water torture that just drags lower and lower and lower. There will be a series of one- or two-day rallies to suck in bottom callers (like me) until those buyers are no longer willing to buy. I'm not sure how likely this is. It wouldn't surprise me if this went on for a while. What sticks in my mind is the Long Term Capital Management (LTCM) blow-up in 1998. LTCM was a hedge fund employing various nobel prize mathematicians that specialized in taking advantage of small imbalances in the market. They bet, and made tons of money, initially, that those imbalances would correct themselves. Eventually, they were too leveraged and couldn't outlast the Russian currency crisis that went on for over a month, I think. Throughout, LTCM kept saying that things would get better because the stock market acts like a bell curve and it's impossible to many high standard deviation events. Well, the outcome of that situation was that it became clear that the stock market does resemble a bell curve, but that "tails are fat" -- meaning that it's rare for high standard deviation events (like we probably have now) to occur, but when they do occur, there's a whole bunch of them that occur together. So we will probably have a big collapse of some sort to have the fat tail on the negative side, then we will have enormous rallies afterward for the fat tail on the positive side.
It's become clear to me that this whole situation is due to massive credit expansion, but that it's not the credit expansion itself that has manifested itself into this current problem. While credit expansion (Greenspan Fed and other central banks) may have been the root cause, the current problem as to why the credit markets are locked is due to counterparty risk. I explained the situation to a co-worker by comparing it to HIV. I said, imagine that there's a whole slew of promiscuous people going crazy boinking each other. One, then another, then another comes down with HIV. The government can hand out condoms and encourage that risky behavior all it wants, but the remaining participants decide to take a break because they've had their fill of excess behavior and will remain on the sidelines until they know the coast is clear.
So essentially, we are reaching the point where it's survival of the fittest. Businesses want to see who's going to survive and who's on their deathbed, letting everything unravel. The Fed has decided to lend to (major) private businesses to allow them to cover their day-to-day expenses like payroll, etc. The pendulum has now swung in the opposite direction, though, and no matter what the Fed does, I don't think businesses will lend until counterparty risk is minimized -- probably through trickle down effect in the economy. What allowed the counterparty risk to exist to this extreme to this point was the credit default swap (loan insurance) market. But that market is dried up. That's a $60-70 trillion market that NOBODY is big enough to hold up.
I can see the Fed coming out with initiative after initiative, funding through Treasury sales and creating massive inflation. That will in turn cause the foreign holders of Treasury securities -- which is somewhere in the 30-45% range -- to begin repatriating their moneys. I would think that the BRIC countries (Brazil, Russia, India, and China), along with Japan, are the largest holders of US Treasuries. The repatriation has to result in China unpegging the renminbi from the US dollar, at which point the renminbi will skyrocket. Russia and India and the OPEC Gulf States will probably shift into petrodollars. Across the board, there will be a shift into gold.
How ironic it would be to doing our own "price discovery" the day after Columbus/Discoverer's Day. For a little less than the past two decades, the VIX volatility indicator has indicated a turning point upward whenever it reached the 55-60 range. It's been well into the 50 range for the past week and a half, 60+ for the past few days, and 70+ for the past couple of days. It didn't exist during the 1987 market crash but I've heard it would have been somewhere in the 150-170 range.
I also can't see how we've reached what's called "capitulation," where everyone throws in the towel in defeat. We need to close at or near the lows on one day, preferably with the so called "circuit breakers" being hit. I believe the current circuit breaker on the DJIA is a 1100 point drop in the market by 2:30p EST. We need to hit that circuit breaker, then close for the day on or near the lows. Then the crash needs to be on the first 2-3 pages of every news paper. The following day, the markets will trade to their lows for the first part of the day, and that's when the buying may (or may not) safely occur. It's possible we may even hit the 2,200 point drop circuit breaker. We haven't gotten to that point yet. There's fear in the market, but not the type of fear that is indicative of a crash. Look at various stock charts. Yes, stocks are down, but aside from financial- and commodity-related companies, there aren't many company's whose stock charts show their stock dropping off a cliff.
The alternative to a crash is even worse...it's that Chinese water torture that just drags lower and lower and lower. There will be a series of one- or two-day rallies to suck in bottom callers (like me) until those buyers are no longer willing to buy. I'm not sure how likely this is. It wouldn't surprise me if this went on for a while. What sticks in my mind is the Long Term Capital Management (LTCM) blow-up in 1998. LTCM was a hedge fund employing various nobel prize mathematicians that specialized in taking advantage of small imbalances in the market. They bet, and made tons of money, initially, that those imbalances would correct themselves. Eventually, they were too leveraged and couldn't outlast the Russian currency crisis that went on for over a month, I think. Throughout, LTCM kept saying that things would get better because the stock market acts like a bell curve and it's impossible to many high standard deviation events. Well, the outcome of that situation was that it became clear that the stock market does resemble a bell curve, but that "tails are fat" -- meaning that it's rare for high standard deviation events (like we probably have now) to occur, but when they do occur, there's a whole bunch of them that occur together. So we will probably have a big collapse of some sort to have the fat tail on the negative side, then we will have enormous rallies afterward for the fat tail on the positive side.
It's become clear to me that this whole situation is due to massive credit expansion, but that it's not the credit expansion itself that has manifested itself into this current problem. While credit expansion (Greenspan Fed and other central banks) may have been the root cause, the current problem as to why the credit markets are locked is due to counterparty risk. I explained the situation to a co-worker by comparing it to HIV. I said, imagine that there's a whole slew of promiscuous people going crazy boinking each other. One, then another, then another comes down with HIV. The government can hand out condoms and encourage that risky behavior all it wants, but the remaining participants decide to take a break because they've had their fill of excess behavior and will remain on the sidelines until they know the coast is clear.
So essentially, we are reaching the point where it's survival of the fittest. Businesses want to see who's going to survive and who's on their deathbed, letting everything unravel. The Fed has decided to lend to (major) private businesses to allow them to cover their day-to-day expenses like payroll, etc. The pendulum has now swung in the opposite direction, though, and no matter what the Fed does, I don't think businesses will lend until counterparty risk is minimized -- probably through trickle down effect in the economy. What allowed the counterparty risk to exist to this extreme to this point was the credit default swap (loan insurance) market. But that market is dried up. That's a $60-70 trillion market that NOBODY is big enough to hold up.
I can see the Fed coming out with initiative after initiative, funding through Treasury sales and creating massive inflation. That will in turn cause the foreign holders of Treasury securities -- which is somewhere in the 30-45% range -- to begin repatriating their moneys. I would think that the BRIC countries (Brazil, Russia, India, and China), along with Japan, are the largest holders of US Treasuries. The repatriation has to result in China unpegging the renminbi from the US dollar, at which point the renminbi will skyrocket. Russia and India and the OPEC Gulf States will probably shift into petrodollars. Across the board, there will be a shift into gold.
Monday, October 6, 2008
Still no capitulation
This blog started off as an assignment for my Education Technology class I'm taking, and I recently modified it for another class, but now I'm thinking I want to blog for real to get my thoughts together. I'm not sure if anyone besides me is reading this, but if there is, they shouldn't be taking any of what I say as investment advice.
This whole situation was foreseeable long, long ago. That's why there's many books already published and at the bookstore. The "stock market" is still overvalued and has lots more to lose...but not necessarily right now. The VIX and VXO volatility indices are hitting levels usually indicative of a turnaround, but I'm not sure how the recent bans on short-selling, etc., impact. All I know is that my bids on gold/mining stocks are getting hit and then still going lower, despite my thinking they are undervalued. And that's the one sector that really does seem undervalued.
The market is turning around as I write this. That's actually not a good thing for the short run. Without the day-end capitulation as usually occurs during crashes, that means there's still lower to go for the general market. I do believe gold mining stocks are closer to the bottom than other stocks. But the rest of the market is in for a stock, volatile, downhill ride.
The Feds are so stupid. $700B isn't going to impact a credit market where the credit default swap market is almost 100 times that. The entire credit freeze is because lending was too lax. Now the pendulum is swinging and lenders are realizing it's best to cut back. On top of that, $700B (while maybe enough for bad mortgages alone) isn't going to actually hit the economy. The loss is already there and the $700B is just going to allow the banks to realize the loss on their accounting books.
Worldwide, central bank lending rates are falling with the flight to quality. Germany Bundesbank is willing to insure all deposits. There will be a dead cat bounce at some point and money will flow out central bank and treasury securities and back into equities. The next move has to be a cut in rates...at least by Euro and British central banks. That's positive for gold. Maybe that will halt the US$ rally. Most people think dollar is weak, but for the past 4 months or so, it's been insanely strong. That's why gold miners are getting hit hard even though gold bullion is adjusting? That doesn't make theoretical sense but is the timing coincidence? New high after new high in the dollar index. I think maybe the media needs to start touting diversification into gold for it to gain momentum. The only people in gold now after it getting crushed are insiders and the professionals...so at least I have good company. I can't imagine any amateurs or weak-hearted being in gold miners at this point. Miners had excellent support at their lows today. Didn't expect it to go that far though. I'd say between this day and last Friday, there was capitulation in the miners. It felt awful lonely trying to buy. There were very few buyers and that's why stops must have been quickly hit and broken through.
Too bad the market didn't close on it's lows today. It rallied to recapture about half of its max loss of 750 points on the DJIA. Dumb, dumb, dumb. Just like Chinese water torture, it'll be a slow and mentally painful spiral down. I thought there would at least be a rally after the $700B bailout bill was passed.
Jim Cramer threw in the towel today. So that's a good sign. I think I need to check the papers and layman investment sites to see what they'll telling people. If it's how bad the economy is and how things look to get worse, then maybe this was indeed capitulation for the moment. As long as they're telling the public to buy on the dips and that this is a great buying opportunity, then we have further to go. That's just how the market works.
This whole situation was foreseeable long, long ago. That's why there's many books already published and at the bookstore. The "stock market" is still overvalued and has lots more to lose...but not necessarily right now. The VIX and VXO volatility indices are hitting levels usually indicative of a turnaround, but I'm not sure how the recent bans on short-selling, etc., impact. All I know is that my bids on gold/mining stocks are getting hit and then still going lower, despite my thinking they are undervalued. And that's the one sector that really does seem undervalued.
The market is turning around as I write this. That's actually not a good thing for the short run. Without the day-end capitulation as usually occurs during crashes, that means there's still lower to go for the general market. I do believe gold mining stocks are closer to the bottom than other stocks. But the rest of the market is in for a stock, volatile, downhill ride.
The Feds are so stupid. $700B isn't going to impact a credit market where the credit default swap market is almost 100 times that. The entire credit freeze is because lending was too lax. Now the pendulum is swinging and lenders are realizing it's best to cut back. On top of that, $700B (while maybe enough for bad mortgages alone) isn't going to actually hit the economy. The loss is already there and the $700B is just going to allow the banks to realize the loss on their accounting books.
Worldwide, central bank lending rates are falling with the flight to quality. Germany Bundesbank is willing to insure all deposits. There will be a dead cat bounce at some point and money will flow out central bank and treasury securities and back into equities. The next move has to be a cut in rates...at least by Euro and British central banks. That's positive for gold. Maybe that will halt the US$ rally. Most people think dollar is weak, but for the past 4 months or so, it's been insanely strong. That's why gold miners are getting hit hard even though gold bullion is adjusting? That doesn't make theoretical sense but is the timing coincidence? New high after new high in the dollar index. I think maybe the media needs to start touting diversification into gold for it to gain momentum. The only people in gold now after it getting crushed are insiders and the professionals...so at least I have good company. I can't imagine any amateurs or weak-hearted being in gold miners at this point. Miners had excellent support at their lows today. Didn't expect it to go that far though. I'd say between this day and last Friday, there was capitulation in the miners. It felt awful lonely trying to buy. There were very few buyers and that's why stops must have been quickly hit and broken through.
Too bad the market didn't close on it's lows today. It rallied to recapture about half of its max loss of 750 points on the DJIA. Dumb, dumb, dumb. Just like Chinese water torture, it'll be a slow and mentally painful spiral down. I thought there would at least be a rally after the $700B bailout bill was passed.
Jim Cramer threw in the towel today. So that's a good sign. I think I need to check the papers and layman investment sites to see what they'll telling people. If it's how bad the economy is and how things look to get worse, then maybe this was indeed capitulation for the moment. As long as they're telling the public to buy on the dips and that this is a great buying opportunity, then we have further to go. That's just how the market works.
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