Monday

The Inflationist: Weekend Summary 080309

Post a Comment March 9, 2009 – 6:37 am |   | Permalink |  Print This Post |

Markets continue its descend last week, with Friday making new lows, confirming that this decline is not over and any call otherwise is nothing but guesswork (including ours). On Friday we predicted a small green candle with upside of 6700+/- 50 points. DJIA did exactly that, registering a high of 6753 and closed 32.5 points up despite being down 3% after the release of another record breaking unemployment number. Our question is what could bring this market significantly lower? At 6500, this decline has taken a 21% toll on the Dow in the last 4 weeks. The collapse of AIG and/or Citibank which is trading <$1 should have little effect on the index directly.

For the week we closed out our Dax/FTSE discrepancy, and did not hold on to any of our trades. We mainly traded based on the strategy of taking half the profit and protecting ourselves by raising our stop losses to our entry points. Our earlier anchors were way too high retrospectively, and we are due for more anchors at this level to average down our entry price. We are still hoping for markets to go lower, we have x2 unhedged long positions with recording significant unrealised losses at only $10/point (which we feel is very conservative and under-leveraged with cash in excess of 30000). Our strategy will be to try to pick a point as close to the bottom as we can, establish heavier anchors to skew our average entry price lower, and hope that markets retrace >50% as they normally do. For those of you who are new, read our previous analysis on market declines in “The Anatomy Of A Crash”.

Wall Street have not responded positively to Obama. Since Obama was elected, the S&P has plunged by 33.7 percent. The change promised have so far have eluded Wall Street and the majority of Main Street. Back when Obama was elected, the markets soared on the news, expecting this change to reverse all the flawed policies of the previous administration. Whilst no one expects this to go away overnight, nor an Obama economic plan based on a knee jerk response to a fall in Dow overnight (which the Bush administration was very fond of), the rate of this decline is frightening. Bailouts upon bailouts have focused on failed financial institutions. A more definitive approach that puts money into the American household will be required to stem the contagion effect of this recession. Whilst analysts are still debating on whether we are at a recession, the American workforce is getting decimated as 12.5 million people are out of work - another record number since WW2.

We will update our portfolio later. For tonight, we expect the Dow to fall. There are now two clear camps out there: the Dow 5000 camp vs “Friday was the low camp”. We are sceptical of both views. We feel that we are close to the bottom, and are setting 6250 +/- 50 points as the bottom. Obviously this is a moving target. If you have no position, this level will be safe as long as one is not overleveraged (even $1/point can hurt as more and more $1 anchors are fired!).

(Portfolio Updated)

Portfolio Summary 08032009