The Margin Call From Hell!! 9-24-08

When I first heard Milton Friedman discuss the “four ways to spend money,” I quickly recognized this analysis as the best argument against government intervention. Now, I do believe that many policymakers have good intentions when they intervene in markets, however, intentions do not justify effective policy. Here are the four ways to spend money.

1. You spend your own money on yourself.
2. You spend your own money on someone else.
3. You spend someone else’s money on yourself.
4. You spend someone else’s money on someone else.

Only under condition 1 is your money put towards the most productive use, and under condition 4, money is most likely to be wasted. Think about how this relates to the Paulson-Bernanke bailout plan. These two men are essentially taking $700 billion in tax dollars and spending it on someone else, and for someone else’s benefit. Not only will they screw the taxpayer who should not be liable for these losses to begin with, but they will likely not even effectively alleviate the problem for the banks. Two men cannot solve the most complex economic crisis in history, gambling with our tax dollars by the way.

When watching the Senate Banking Committee hearing yesterday, I quickly realized that Paulson and Bernanke’s plan does not even have a chance of working. Paulson and Bernanke were essentially asking the taxpayers to cover MARGIN CALL FROM HELL on behalf of the banks. The problem here is that the underlying “assets,” the CDO’s that are causing all these problems are still loosing value as housing prices correct. By putting up the capital to cover the banks margin call we are not doing anything but prolonging the problem to a future day when the banks will ask for more capital due to another “margin call”. The margin calls will keep coming until the housing market bottoms out on its own.

Don’t buy the Rally! 9-19-08

The manipulation going on in these markets is truly unbelievable. These measures by the government just prove the point that most of the finanical stocks are worthless and need special protection. If the balance sheets of these companies were healthy, shorting would not be profitable! It is only profitable because almost any financial entity with exposure to CDO’s is overvalued and should be shorted.

Look at the chart above. Despite the government’s efforts to save the financial system, investors are still not convinced this will change anything. We gapped much higher in the XLF but are already selling off hard from the highs. We ran right into the 200-day SMA, a mark we have not been above since the sub prime mess started. Bottom callers have been wrong 100 times already this year, so never believe them when they tell you this time it’s different. Just look at the charts. There will be more pain ahead.

It seems SKF is frozen right now, I hope nobody who is reading this was holding overnight positions. As I said on Monday, I sold out of skf and just daytraded some of the big swings.

Gold DeCouples from Markets 9-17-08

We are currently up over $50 in the yellow metal on further concerns over the financial sector. Gold and silver mining companies are about the only thing trading in the positive today (other than the bear market ETF’s). Gold investors have been waiting for this moment for years. Precious metal stocks are separating from the main markets as investors run for safety.

As I mentioned in yesterday’s post we should be going to the 1050 area in S&P. Yesterdays rebound was a great opportunity to get short. Skf’s are looking great today. Any short positions I hold are mainly day trades or maybe a few overnight positions, but this is a very risky environment so it is never to early to take profits, and set tight stops.

For a good insight into why we are selling off hard, read today’s Market Ticker by Karl Denninger, and watch the video below.

Watching the Fed 9-16-08

As I mentioned yesterday I moved most of my money to the sidelines, and I suggest all small investors to do the same. Only the most disciplined, even keeled, fast day traders should even think to be involved in this market. Again it is tempting to go short the bank stocks, but with no consistency in the Fed and Treasuries policy, who knows what they are coming up with now. As bad as thinks look, bear markets never fall strait down. There will be sharp rallies and they often come very quickly, so it would not be smart to get caught short right now. THE MAIN GOAL IS CAPITAL PRESERVATION!

I mentioned last Friday that a rate cut would be on the table for this afternoon. This has become mainstream thinking as of this morning, and treasuries are pricing in rate cuts as well. The 2-year bond is now trading around 1.60 yield! It was around 2.25 last week! Be prepared for a potential afternoon rally when the Fed attempts to pacify the markets.

Goldman Sachs came out with earnings this morning and although they were bad by Goldman standards, hey at least they aren’t losing billions. Goldman Earnings

In the chart below I’ve posted a head and shoulders formation that I have seen developing for a while. It looks like we will break the neckline soon and this should take us in the vicinity of 1050. I see this as a mid term play, by late October or November I think we will get there.

Financial Meltdown 9-15-08!

I sold out of SKF this morning and now hold about 50% gold miners, 50% cash. Many would feel tempted to short the financials due to all the gloom, but your best bet is to stay on the sidelines and wait. It is clear the bankers and government authorities are doing everything in their power to keep this market propped up. As small investors we have no idea what kind of back room deals are brewing, but you can be sure when sentiment is this low, something will be spun off to save this market from tanking even further. This time things may be different than Bear Stearns day, so just watch the events unfold and don’t be a participant.

I recommend reading today’s Market Ticker. It is a good take on this weekends events.

Gold is making a big run again. Treasuries are seeing a huge jump too. According to the market these are the only two safe havens. But which would you rather own?

Bottom in for Gold 9-12-08

This was it. The bottom in gold has been put in, confirmed by the amazing gains in the mining stocks. It is not too late to get in on the party. The fall rally is here.

Tuesday the fed is announcing rate changes. There is a lot of talk about them cutting rates. The recent decline in 2-year treasury yields seems to be pointing to their next move. The fundamentals come out in the charts first. News follows the direction of the trend. The dollar is reversing course.

Reversal In Gold 9-12-08

Well I’m watching the gold sector very closely these last couple days. I think the reversal is very evident with the strength we are seeing today in the miners. Earlier in the week I mentioned how we saw an up day in the ^hui index while gold sold off about $30.

All the other commodity related sectors are also having a big day. Oil seems to be holding the $100 level and we see the independent oil and gas up big.

Anywhere Safe to Invest?

Well it’s been a few days since I last posted. I’ve been out of town the beginning of the week, and most of the time I was just grimacing in pain as I watched this washout occurring.

Anyone who has read this blog knows I am bullish on commodities. So as expected, I’m feeling a little sick watching this slaughtering take place. I got stopped out for a loss last week in my gold holdings, luckily so because we are much lower than before. There is no reason to re enter the commodity markets, or the equity markets unless you are on the short side. I am sure however that we are near capitulation in the commodities markets. This is true panic selling I doubt there are many longs left. Just go to some of the gold bugs message boards. Most of the overly optimistic bulls have turned silent. I will not be picking a bottom however, but one sign of optimism came yesterday as the gold miners were up with the metal down 3%+. Short covering? Maybe, but often the mining stocks turn before the metal itself does. Something interesting to watch but not enough evidence to act on.

We are set for another big decline in the equities markets today as the financials are set to sell off courtesy of Lehman Brothers and weak financial data. A bad jobs report, increasing trade deficit, tax evasion scandals, a hurricane in the gulf, all seem to point to a strong sell-off today. Our SKF holding is up big in premarket trading (added sub 100 Monday!)

At this point there is little evidence to get bullish in any sector. I’d be watching from the sidelines (with the strong dollar, why not hold cash) or just short the indexed funds.

More Pain Ahead 9-5-08

So in the last update I mentioned how I was a bit confused about the metals and energy markets, but I was confident a big sell off would occur in the main indexes. Luckily I got short the S&P and financials before yesterdays trading, and I hold those short positions because more pain lies ahead.

Sept. 5 (Bloomberg) — The U.S. lost more jobs than forecast in August and the unemployment rate climbed to a five- year high, heightening the risk that the economic slowdown will worsen.

Payrolls fell by 84,000 in August, and revisions added another 58,000 to job losses for the prior two months, the Labor Department said today in Washington. The jobless rate jumped to 6.1 percent, matching the level of September 2003, from 5.7 percent the prior month.

The data is causing the dollar to drop big this morning and gold is having a powerful morning rally. I’m also long gold at this point, I don’t see us going lower from here.

In the recent weeks we have seen some exceptional resiliency out of the tech sector. Over the last couple days we have seen this trend break down, you could say the q’s were the catalyst leading this market down yesterday especially the semicontuctors. However when it comes to this sector the easy money is out and I would not go trying to sell at these levels. I think we will retest the lows (42 in qqqq) from March, but that does not give us a lot of profit potential, considering the risk.

So I’m going back to my bread and butter again, SKF. The financial stocks have been trading sideways for a few weeks here and we have a lot of room before we reach the lows from the middle of July. I expect the downtrend will continue so a breach of those lows is very probable. In this case I feel SKF will give the largest profit potential with less risk.

Stocks set to drop 9-3-08

Three day weekends are usually very hectic. With huricanes in the gulf, political conventions, geopolitical tensions, a weakening European economy, who knows where this market is going. That’s why we are getting such huge trading ranges in these markets. For most investors this is the time to wait on the sidelines.

Gold decided not to break through the inverse H&S neckline and plunged again, thanks in part to the dollar continuing its run. I’m pretty much done trying to predict a top with this one. I can’t believe it is still rallying from such overbought levels.

Oil and natural gas fell as well, apparently because Gustav did little to no damage to the rigs. I did not see any hurricane premium attached to the price of energy, so I’m very surprised that we would see such a drop, especially since we have two other storms that are already on the way.

I do stand confident in my short positions in the S&P and financials. Yesterday we saw a huge gap up, lower oil prices and great optimism about the possibility of a big run to the upside. We quickly reversed and ended with an outside day down which usually points to more downside in the following days. Again we couldn’t break resistance at the 11800 level so I’m sticking with downside bias.