Wednesday, February 28, 2007


My sincere apologies for being out of the loop for so long. My lack of posts has corresponded nicely with a severe lack of discipline as well, and I was caught yesterday extremely long in some highly leveraged positions. I played the bottom right, called the Bernanke relief rally last night, and exited today up about 12%. Not enough to completely contain the damage, but a lot better than last night.

Here's my take on where we go from here:

* Recession Fears. There are plenty of signs that we're in late cycle at the moment - Greenspan is dead right about this. We've got an inverted yield curve (and have for quite some time). The dollar is weak and getting weaker. Corporate profits are stabilizing and capital expenditure is slowing. Companies can't productively spend the money that they're making.

* Subprime Loan Implosion. This market is ready to implode. Customers are faced with skyrocketing mortgage bills, sometimes having to pay 75% more in premiums than before. Freddie Mac is not buying these anymore. With subprime debt harder to get for customers, the low end of the real estate market tightens up considerably. Housing will be hard pressed to turn if people can't get mortgages anymore.

* Goldilocks is priced in. One of the reasons that we had a spectacular move in the S&P from last August until now is that we went from expecting one more rate hike to expecting cuts from the Fed. This changing expectation correlates perfectly to the rise in equities on a graph. Now, we've got cuts on the horizon, but uncertainty as to when and how much. Everyone knows about "goldilocks" now and if any evidence comes in to the contrary, we'll get hit. This goes back to my post earlier in the year talking about massive jitters if rate cuts don't materialize.

All of the above points argue solidly for a more accommodative policy from the Fed. However, by passing on the rate hike last year, Bernanke has much less room to move. Since his hands are tied, we'll need to wait for things to get really bad (e.g. a subprime collapse) before he has a cover to ease. This spells a lot of turmoil in the markets over the next few weeks.

With this in mind, I'm going to safety mode. I've exited most of my speculative trades and I'm moving into low multiple stocks and high yielding stocks. (This is Cramer's advice.) Adding to GS here and opening up MO here as well. I still like the metals and will go hard into them if they correct significantly. I think gold is a good hedge against a weak dollar if the market starts to anticipate a rate cut (negative for the dollar), so I'm still long AUY and looking for entry points.

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