Continuing on the theme of fall colors, the above picture is from my garden too. Maple leaves falling off from that little thing I planted over five years ago. That little thing ( the maple tree) has now grown over 10 feet

I wanted to touch on the state of the market as we close the month of October. The last two months have been a very strange market. despite watching this market every single day the last 10 years, I could not put my finger on its pulse. Of course if anything I have learned all these years , it is that, expect the unexpected
Normally when bonds rally, when Yen rallies one concludes that there is risk aversion in the air and you would expect a sideways to down equity market, a contracting commodities market. The last two months have been anything but normal, every thing has rallied in sync, the correlation that existed the last few years seems to have all turned upside down.

I have looked for what the pundits are saying in terms of explaining these moves. One answer the QE2 ( Quantitative Easing 2) program which the feds are supposedly going to launch first week of November…although no one knows for sure…yours truly included. Why on earth fed will do quantitative easing when the last easing has not helped much. Doesn’t the fed run the risk of stoking inflation if they did that? In my criticism, I guess I am being moderate , the bond guru Bill Gross has taken it a step further and calls it a Ponzi scheme.

I don’t think this weird market can continue for very long. Something gotta give- either the bonds are going to sell off hard ( which they have already started with a recent 35 basis jump in yields) or Gold, Silver and the likes are going to come crashing down. In the meanwhile, this liquidity driven market has one clear victim- USD is selling off across the board, here are some of the popular currency pairs:

Euro has been flirting with 1.40 , from a recent low of 1.18 ( April 2010)
GBP is above 1.60 compared to a recent low of 1.44 ( April 2010)
CAD ( Canadian Dollar), AUD (Australian dollar)- almost at par with USD (99.9) , compared to in 80s (AUD) and 90s(CAD) back in April. Even slightest of move in the market, and these currencies will overtake USD.
CHF (Swiss Franc) – new all time high: 1.06 from .9 something back in April ( so it has actually overtaken USD).
Japanese Yen -new 15 year high at 80.35 from 90 something back in April ( within striking distance of 79.70- the all time high for this pair).

Precious metals are also on fire
Gold at life time high near $1375 /oz from $1100/oz in April ( not adjusted for inflation).
Silver at life time high $24/oz from $19/oz in April ( not adjusted for inflation).

Other metals like Copper, Iron, Zinc are all in steep bull run.
Agricultural commodities like Wheat , Rice, Sugar, Soybean, Corn are all breaking to new highs ( wheat has jumped 46% since June).

Given the deficit US is running, these macro moves are not unexpected, what worries me is the speed with which these moves are unfolding. A real threat of stagflation- where there is inflation (even hyperinflation), but no growth in real wages or economy to support it. All these forces have been unleashed on the financial markets, thanks to the speculation of QE2 which is now priced in the market. I am not sure if fed ( Federal reserve) will really follow through with its (implied) promise for QE2, it all seems to be setting up for a big disappointment. Meanwhile we are in uncharted territory… with uncontrolled forces unleashed in the markets…time for a new normal.

>

Continuing on the theme of fall colors, the above picture is from my garden too. Maple leaves falling off from that little thing I planted over five years ago. That little thing ( the maple tree) has now grown over 10 feet

I wanted to touch on the state of the market as we close the month of October. The last two months have been a very strange market. despite watching this market every single day the last 10 years, I could not put my finger on its pulse. Of course if anything I have learned all these years , it is that, expect the unexpected
Normally when bonds rally, when Yen rallies one concludes that there is risk aversion in the air and you would expect a sideways to down equity market, a contracting commodities market. The last two months have been anything but normal, every thing has rallied in sync, the correlation that existed the last few years seems to have all turned upside down.

I have looked for what the pundits are saying in terms of explaining these moves. One answer the QE2 ( Quantitative Easing 2) program which the feds are supposedly going to launch first week of November…although no one knows for sure…yours truly included. Why on earth fed will do quantitative easing when the last easing has not helped much. Doesn’t the fed run the risk of stoking inflation if they did that? In my criticism, I guess I am being moderate , the bond guru Bill Gross has taken it a step further and calls it a Ponzi scheme.

I don’t think this weird market can continue for very long. Something gotta give- either the bonds are going to sell off hard ( which they have already started with a recent 35 basis jump in yields) or Gold, Silver and the likes are going to come crashing down. In the meanwhile, this liquidity driven market has one clear victim- USD is selling off across the board, here are some of the popular currency pairs:

Euro has been flirting with 1.40 , from a recent low of 1.18 ( April 2010)
GBP is above 1.60 compared to a recent low of 1.44 ( April 2010)
CAD ( Canadian Dollar), AUD (Australian dollar)- almost at par with USD (99.9) , compared to in 80s (AUD) and 90s(CAD) back in April. Even slightest of move in the market, and these currencies will overtake USD.
CHF (Swiss Franc) – new all time high: 1.06 from .9 something back in April ( so it has actually overtaken USD).
Japanese Yen -new 15 year high at 80.35 from 90 something back in April ( within striking distance of 79.70- the all time high for this pair).

Precious metals are also on fire
Gold at life time high near $1375 /oz from $1100/oz in April ( not adjusted for inflation).
Silver at life time high $24/oz from $19/oz in April ( not adjusted for inflation).

Other metals like Copper, Iron, Zinc are all in steep bull run.
Agricultural commodities like Wheat , Rice, Sugar, Soybean, Corn are all breaking to new highs ( wheat has jumped 46% since June).

Given the deficit US is running, these macro moves are not unexpected, what worries me is the speed with which these moves are unfolding. A real threat of stagflation- where there is inflation (even hyperinflation), but no growth in real wages or economy to support it. All these forces have been unleashed on the financial markets, thanks to the speculation of QE2 which is now priced in the market. I am not sure if fed ( Federal reserve) will really follow through with its (implied) promise for QE2, it all seems to be setting up for a big disappointment. Meanwhile we are in uncharted territory… with uncontrolled forces unleashed in the markets…time for a new normal.

As I watch the markets soar in almost all asset class, seems like a Deja Vu… Market goes in a gut wrenching tailspin and then a violent snap back, I almost saw it coming and noted earlier in my blog post here. How did I know the bounce was coming, well I didn’t know it exactly, I just thought it was a high probability event, the market could as easily have gone 20% lower.

Silver up 77% year to date( $15.65/ Oz), crude up 45% ( $66.50/barrel), emerging markets anywhere from 45 to 75% , Dow Jones, S&P, Nasdaq all have bounced noticeably from their nadir made in the beginning of this year. Similarly German DAX has bounced from 3600 to 4900, Hong Kong HSI from 10600 to 18000+. All the currencies have rallied sharply – GBP from 1.35 to 1.62, Euro from 1.23 to 1.42, Canadian Dollar from .75 cent to .92 cents, Indian Rupee from 52 to 46. At $980/oz Gold is about to challenge its previous high of $1050/oz. The long term reader of this blog know I have been bullish on precious metals for a long time, I eagerly wait Gold to take out $1050 and move to new highs!

If you thought all was honky-dory, well not so quick! There are some noticeable markets which have gotten clobbered and so have some iconic stocks.. GM is still preparing for a bankruptcy filing as soon as this Monday, end of an era according to some. Natural Gas at $3.65/ Million BTU is 35% down for the year, I knew there’s supply glut in this market, but this kind of price weakness, I find hard to explain, given that all other major commodities have nicely moved off their bottom. Same deal with Treasury bonds, boy what a huge sell off. Fed has kept its overnight lending rate between 0 and .25% since last December, which kind of made the bond investors complacent . No wonder, what appeared like small profit taking in the beginning of this year, has turned into a complete run for the exits. The 10 year yield has made a complete U turn reversal, from a 2% yield in the beginning of the year, it has rocketed to a recent high of 3.75%, an almost doubling. The bond investors have really taken a hit on their chin, a complete opposite of the healthy return they enjoyed last year.

I am a follower of technical analysis, my thought process is always around probabilities and I am ready to bail out when market does not behave as I expect it to. Seems simple..right, but it is tough to follow, it runs contrary to human mental makeup. Human’s have a predisposition to hope, but in markets hope could be your worst enemy. Similarly logical thinking, intelligence, not accepting defeat is considered a virtue in life and we certainly expect that from our leaders. The same trait can turn out to be very dangerous in market. You start to think, you are very intelligent logical thinker, how can you possibly get it wrong, and you take this high-headedness to the market. Rest assured the market is going to humble you very soon, it could be a very sobering place. I have been there, I know first hand, now I am a life long student of markets, and hopefully it will pay off.

Markets are all about getting your hands around the uncertainties, accepting risks, accepting frequent defeats and moving on. It is not a sprint, it is a marathon, you need to conserve your energy and capital to outlast the market volatility. Lose the small battle but win the war. Lose your ego, but not your capital, cut your losses and run. Use your left brain but not to predict market moves and stubbornly wait for vindication while the market decimates your account. Instead use your left brain to map out scenarios, what if games, what are your profit targets, what is your game plan, what kind of market move will prove you wrong and you will close the position. What kind of risk management you will employ- fixed dollar loss, fixed percentage loss, break of trend line, adverse move of greater than 2.5 ATR ( Average True Range), break of Bollinger bands, break of Keltner channels, break of moving averages, non confirmation from other indicators, deteriorating market internals….pick your favorite and have a strategy in advance and then the courage of convictions and discipline to follow your strategy. Do not start to second guess your risk management decisions and get in hope mode…I will make the exception only this time..nope, bad idea! You never know when an innocent move can snowball into a carnage. As in life, so in markets, a well thought out strategy has a high chance of working..have one!!

I read a nice book on risk management by ken Grant called Trading Risk. You can read my review of this book on Amazon here. Ken likes to call money spent on managing risk really an investment rather than a liability. Just like we take out insurance policies, protecting ourselves from situation beyond our control, same deal with spending money on risk management, it protects your capital..and if you have the capital, you can comeback and play a second inning or third or fourth…you get the idea. Risk Management has never been more important than today given there is no place to hide in an adverse market move. Diversification which can be a good risk mitigation strategy turned out woefully inadequate in the bear market of 2008 where every single asset class spiraled down in a highly correlated way. Risk Management would have been the only tool to really save you from yourself.

Once again, I like to put my usual disclaimer, none of the above should be considered a recommendation to buy or sell any asset class. The opinion here are solely my personal and is not intended to be a professional advise. Investing is a “Risky Business” ( à la Tom Cruise.. topic of another blog ). All I am trying to do here is to help you make smart decisions, it does not take away your own due diligence in any investment you make.

>
As I watch the markets soar in almost all asset class, seems like a Deja Vu… Market goes in a gut wrenching tailspin and then a violent snap back, I almost saw it coming and noted earlier in my blog post here. How did I know the bounce was coming, well I didn’t know it exactly, I just thought it was a high probability event, the market could as easily have gone 20% lower.

Silver up 77% year to date( $15.65/ Oz), crude up 45% ( $66.50/barrel), emerging markets anywhere from 45 to 75% , Dow Jones, S&P, Nasdaq all have bounced noticeably from their nadir made in the beginning of this year. Similarly German DAX has bounced from 3600 to 4900, Hong Kong HSI from 10600 to 18000+. All the currencies have rallied sharply – GBP from 1.35 to 1.62, Euro from 1.23 to 1.42, Canadian Dollar from .75 cent to .92 cents, Indian Rupee from 52 to 46. At $980/oz Gold is about to challenge its previous high of $1050/oz. The long term reader of this blog know I have been bullish on precious metals for a long time, I eagerly wait Gold to take out $1050 and move to new highs!

If you thought all was honky-dory, well not so quick! There are some noticeable markets which have gotten clobbered and so have some iconic stocks.. GM is still preparing for a bankruptcy filing as soon as this Monday, end of an era according to some. Natural Gas at $3.65/ Million BTU is 35% down for the year, I knew there’s supply glut in this market, but this kind of price weakness, I find hard to explain, given that all other major commodities have nicely moved off their bottom. Same deal with Treasury bonds, boy what a huge sell off. Fed has kept its overnight lending rate between 0 and .25% since last December, which kind of made the bond investors complacent . No wonder, what appeared like small profit taking in the beginning of this year, has turned into a complete run for the exits. The 10 year yield has made a complete U turn reversal, from a 2% yield in the beginning of the year, it has rocketed to a recent high of 3.75%, an almost doubling. The bond investors have really taken a hit on their chin, a complete opposite of the healthy return they enjoyed last year.

I am a follower of technical analysis, my thought process is always around probabilities and I am ready to bail out when market does not behave as I expect it to. Seems simple..right, but it is tough to follow, it runs contrary to human mental makeup. Human’s have a predisposition to hope, but in markets hope could be your worst enemy. Similarly logical thinking, intelligence, not accepting defeat is considered a virtue in life and we certainly expect that from our leaders. The same trait can turn out to be very dangerous in market. You start to think, you are very intelligent logical thinker, how can you possibly get it wrong, and you take this high-headedness to the market. Rest assured the market is going to humble you very soon, it could be a very sobering place. I have been there, I know first hand, now I am a life long student of markets, and hopefully it will pay off.

Markets are all about getting your hands around the uncertainties, accepting risks, accepting frequent defeats and moving on. It is not a sprint, it is a marathon, you need to conserve your energy and capital to outlast the market volatility. Lose the small battle but win the war. Lose your ego, but not your capital, cut your losses and run. Use your left brain but not to predict market moves and stubbornly wait for vindication while the market decimates your account. Instead use your left brain to map out scenarios, what if games, what are your profit targets, what is your game plan, what kind of market move will prove you wrong and you will close the position. What kind of risk management you will employ- fixed dollar loss, fixed percentage loss, break of trend line, adverse move of greater than 2.5 ATR ( Average True Range), break of Bollinger bands, break of Keltner channels, break of moving averages, non confirmation from other indicators, deteriorating market internals….pick your favorite and have a strategy in advance and then the courage of convictions and discipline to follow your strategy. Do not start to second guess your risk management decisions and get in hope mode…I will make the exception only this time..nope, bad idea! You never know when an innocent move can snowball into a carnage. As in life, so in markets, a well thought out strategy has a high chance of working..have one!!

I read a nice book on risk management by ken Grant called Trading Risk. You can read my review of this book on Amazon here. Ken likes to call money spent on managing risk really an investment rather than a liability. Just like we take out insurance policies, protecting ourselves from situation beyond our control, same deal with spending money on risk management, it protects your capital..and if you have the capital, you can comeback and play a second inning or third or fourth…you get the idea. Risk Management has never been more important than today given there is no place to hide in an adverse market move. Diversification which can be a good risk mitigation strategy turned out woefully inadequate in the bear market of 2008 where every single asset class spiraled down in a highly correlated way. Risk Management would have been the only tool to really save you from yourself.

Once again, I like to put my usual disclaimer, none of the above should be considered a recommendation to buy or sell any asset class. The opinion here are solely my personal and is not intended to be a professional advise. Investing is a “Risky Business” ( à la Tom Cruise.. topic of another blog ). All I am trying to do here is to help you make smart decisions, it does not take away your own due diligence in any investment you make.

With Dow Jones Industrial Average flirting with 6500-6600 level, I am finally ready to declare it cheap enough for me to head back in. I know , I know the market can fall another 1000 points from here, but I guess I am fine with it. I can take that much of risk, the rewards justify it. As they say nothing ventured nothing gained!!

What else, metal markets- Gold, I am little frustrated, the Gold keeps bumping against the 1025-1050 /oz level and backs off. Gosh when is it going to finally break it…but this perma bull on precious metals is not going to give up so easily, not unless we see $2000-2200/ oz! Silver, well that’s another story. I can easily see it going to $35/oz ( my personal target anyway) in next couple of years from the current $13/oz. This poor cousin of gold has languished for so long, far beyond the underlying fundamentals suggest. I really think this metal, after many false starts, is finally on the cusp of next move higher. How about Crude? Well in this market, the damage done is so huge ( from $147.50/ barrel to $33/barrel in less than a period of 4 months), it is going to take it some time before it recovers. I am not buying, not just yet.

Now coming to the currencies market, I think USD had good rally, but any further upside may be limited. That said, I do not expect USD to reverse course anytime soon. I always thought at 1.60 Euro was overvalued ( if you look through the archives of this blog), so was GBP at 2.10, those days are long gone. The fundamental problems that affect US also affect Europe. If we have a recession in North America, do you think Germany or Japan or Great Britain is immune form it, actually they are worse off. I am therefore expecting status-quo in this market, but for some relief rally which likes of GBP, Euro , Australian Dollar may get.

Bond markets, this one has been hard to predict, if you bet against it, you are doomed, given the flight to safety related rallies this market keeps getting, if you go long, you are doomed given the huge budget deficits we are creating ( trillions of dollars). I have been neutral on this market for some time now. Will let it play out and see what happens.

Again, I would like to end with a disclaimer, none of this should be deemed an advise to go long or short in any of the markets mentioned above. The opinion here are solely my personal and is not intended to be a professional advise. This post merely reflects my positioning in the current market environment. Any decision you take should be in keeping with your investment goals and time horizons. Good luck.. now go and make some money in the markets!!

>With Dow Jones Industrial Average flirting with 6500-6600 level, I am finally ready to declare it cheap enough for me to head back in. I know , I know the market can fall another 1000 points from here, but I guess I am fine with it. I can take that much of risk, the rewards justify it. As they say nothing ventured nothing gained!!

What else, metal markets- Gold, I am little frustrated, the Gold keeps bumping against the 1025-1050 /oz level and backs off. Gosh when is it going to finally break it…but this perma bull on precious metals is not going to give up so easily, not unless we see $2000-2200/ oz! Silver, well that’s another story. I can easily see it going to $35/oz ( my personal target anyway) in next couple of years from the current $13/oz. This poor cousin of gold has languished for so long, far beyond the underlying fundamentals suggest. I really think this metal, after many false starts, is finally on the cusp of next move higher. How about Crude? Well in this market, the damage done is so huge ( from $147.50/ barrel to $33/barrel in less than a period of 4 months), it is going to take it some time before it recovers. I am not buying, not just yet.

Now coming to the currencies market, I think USD had good rally, but any further upside may be limited. That said, I do not expect USD to reverse course anytime soon. I always thought at 1.60 Euro was overvalued ( if you look through the archives of this blog), so was GBP at 2.10, those days are long gone. The fundamental problems that affect US also affect Europe. If we have a recession in North America, do you think Germany or Japan or Great Britain is immune form it, actually they are worse off. I am therefore expecting status-quo in this market, but for some relief rally which likes of GBP, Euro , Australian Dollar may get.

Bond markets, this one has been hard to predict, if you bet against it, you are doomed, given the flight to safety related rallies this market keeps getting, if you go long, you are doomed given the huge budget deficits we are creating ( trillions of dollars). I have been neutral on this market for some time now. Will let it play out and see what happens.

Again, I would like to end with a disclaimer, none of this should be deemed an advise to go long or short in any of the markets mentioned above. The opinion here are solely my personal and is not intended to be a professional advise. This post merely reflects my positioning in the current market environment. Any decision you take should be in keeping with your investment goals and time horizons. Good luck.. now go and make some money in the markets!!

The last week was historic from any measure, the S & P and Dow Jones Index had the highest ever fall ( around 18%) with a cumulative loss of over 40% from their October 2007 peak. The historical significance is well captured by this article form Barrons. The historic simultaneous rate cut form the central banks around the globe ( US, Europe, Canada, Australia,South Korea, Taiwan and Hong Kong) also couldn’t help much. I saw the market closely, no asset class was spared, there was sell off across the board- treasury bonds,commodities, stocks, emerging markets and currencies. Literally there was no place to hide other than probably gold which did see some bids on flight to safety fears. What does it mean, is it a buying opportunity? Depends, if you are a long term investor( 5 to 10 years), may be yes. Otherwise, I do not expect the markets to recover anytime soon. The damage done is huge and it is going to take more than couple of days of short covering rallies to really stop this carnage. The market needs to stabilize first, then couple of months of consolidation phase will likely follow and after that the market can either take next leg down or try to put up some defense and bounce back. Yes one should buy low and sell high, but that approach has its own risk. Had you bought Lehman or Washington Mutual or Freddie Mac or Fennie Mae, your investment would have gone to near zero, no matter what strategy you applied. No amount of bottom fishing or dollar cost averaging would have saved you. So a caution is in order. I know, because for some time I ignored the advise of trusted magazine like Barron which had warned investors about these institutions and still bought the stocks thinking all the bad news is priced in. Guess what, the unthinkable happened and now these companies, which were shining stars just a year ago, are all bankrupt! Obviously I learned a very costly lesson and here I thought I knew all about investing! Buy low PE companies didn’t work! Buy low , sell high didn’t work. There are times where no strategy is going to work other than staying in cash, there is a reason why in investing you hear many times- cash is king!! That may be the best strategy for now.
The markets will recover, they always do, but we need to wait and watch for the signs, no point jumping the gun. Once the market really recovers, there is going to be plenty of opportunity to deploy your capital, for now though, I am sitting on my hands and not investing anywhere, not even in my favorite plays(commodities) , for all I know there may be a deflationary cycle coming and these commodities can stay in a trading range for a long time. I get tempted to buy these commodities but then remind myself how gold, silver , crude all stagnated for years ( 1985 to 2002, oh yes crude did had some bounce during gulf war I, 1991-92, but that was short lived ), who knows we may be entering one such period. Better safe than sorrow!!

>
The last week was historic from any measure, the S & P and Dow Jones Index had the highest ever fall ( around 18%) with a cumulative loss of over 40% from their October 2007 peak. The historical significance is well captured by this article form Barrons. The historic simultaneous rate cut form the central banks around the globe ( US, Europe, Canada, Australia,South Korea, Taiwan and Hong Kong) also couldn’t help much. I saw the market closely, no asset class was spared, there was sell off across the board- treasury bonds,commodities, stocks, emerging markets and currencies. Literally there was no place to hide other than probably gold which did see some bids on flight to safety fears. What does it mean, is it a buying opportunity? Depends, if you are a long term investor( 5 to 10 years), may be yes. Otherwise, I do not expect the markets to recover anytime soon. The damage done is huge and it is going to take more than couple of days of short covering rallies to really stop this carnage. The market needs to stabilize first, then couple of months of consolidation phase will likely follow and after that the market can either take next leg down or try to put up some defense and bounce back. Yes one should buy low and sell high, but that approach has its own risk. Had you bought Lehman or Washington Mutual or Freddie Mac or Fennie Mae, your investment would have gone to near zero, no matter what strategy you applied. No amount of bottom fishing or dollar cost averaging would have saved you. So a caution is in order. I know, because for some time I ignored the advise of trusted magazine like Barron which had warned investors about these institutions and still bought the stocks thinking all the bad news is priced in. Guess what, the unthinkable happened and now these companies, which were shining stars just a year ago, are all bankrupt! Obviously I learned a very costly lesson and here I thought I knew all about investing! Buy low PE companies didn’t work! Buy low , sell high didn’t work. There are times where no strategy is going to work other than staying in cash, there is a reason why in investing you hear many times- cash is king!! That may be the best strategy for now.
The markets will recover, they always do, but we need to wait and watch for the signs, no point jumping the gun. Once the market really recovers, there is going to be plenty of opportunity to deploy your capital, for now though, I am sitting on my hands and not investing anywhere, not even in my favorite plays(commodities) , for all I know there may be a deflationary cycle coming and these commodities can stay in a trading range for a long time. I get tempted to buy these commodities but then remind myself how gold, silver , crude all stagnated for years ( 1985 to 2002, oh yes crude did had some bounce during gulf war I, 1991-92, but that was short lived ), who knows we may be entering one such period. Better safe than sorrow!!

The market has been in turmoil lately, what with the fall of Investment Banking Giant Lehman Brothers, government takeover of Freddie Mac and Fennie Mae, government bailout of AIG, sale of Merry Lynch and the USD 700 billion bailout package to Wall Street! All the markets are in frenzy. As the European and British economy weakened, USD rallied initially and touched one year high against major currencies ( Euro peak of 1.61 to trough of 1.38), GBP ( peak of 2.12 to trough of 1.73) , Australian Dollar ( 98 cents to 77 cents) only to now give back sizable chunk of gains. For a period, I was thinking, bad days of USD are over and we can steadily improve from here. I hoped with a new President elected in November, who can presumably reign in deficit and bring our troops home, USD can get some of its shine back. Guess not! Seems like we are in for some more pain! Euro is now back to 1.48 after rallying some 4 cents in one single day! GBP is back to 1.85 and Australian Dollar is nearing 84 cents, go figure!
Currency Markets are not the only one undergoing price swings, same deal with the precious metal markets. Silver sold off from a peak of $21/oz earlier this year to $10.20/oz recently destroying many commodity long funds in the process only to rally back to $13.75/oz in few sessions. Similarly Gold Nosedived from 1025/oz to $730/oz and back to $915/oz in few sessions. Same deal with crude oil, from $147/ barrel to $90 / barrel and back to $122/barrel.
In bonds market, long bonds ( 30 year treasury) rallied almost up to 124.00 and 10 year notes to 119.5 before selling off fiercely to 116 on long bond (a move of approximately 80 basis points in terms of the yield curve) and 114 on the 10 year notes. Same deal with stock market, one day up 400 points DJIA (Dow Jones industrial Average) on bailout news, next day 400 sell off on Democratic party hurdle to bailout efforts. In this atmosphere it is very easy to get whipped both ways, and cash seems like the best position to have. I interact with other professional Money Managers and talking to them it seems like this market has amazed every one! To quote one of my Mentors in the field – she looks at the volatility and says, gosh in this business, never say never, no one could have foreseen such a wild volatility! well said, as a testimony to that I saw HSI ( Hong Kong) sell off to 16.5k from 19.5K in 2 days and then back again to 19.5k. Some of this volatility is going to take its toll and I am thinking some of the weaker hands in fund management business will close their door. You need ultimate risk management to survive in this environment! Additionally one needs to adjust position sizing to account for this increased volatility. As the volatility goes up, options premium shoots up ( a good measure of option premium is the VIX index, also called the fear index which has spiked from a low of 10 in beginning of 2007 to north of 30 today), ATR (Average True Range) shoots up. A good risk management strategy in such an environment would require reducing position sizing proportionately ( in other words reduce the leverage) so that total amount at risk stays constant. The money spent to manage risk should be treated as an investment in long term financial health and not to be fretted upon. It is OK to get whipsawed in this market every once in a while, you can still survive, but not OK to let go of risk control and ride the volatility all the way up and down! Hope this volatility, as it enters the history books, will serve as an eye opener for the money managers and we all can learn a lesson or two in risk management!!

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The market has been in turmoil lately, what with the fall of Investment Banking Giant Lehman Brothers, government takeover of Freddie Mac and Fennie Mae, government bailout of AIG, sale of Merry Lynch and the USD 700 billion bailout package to Wall Street! All the markets are in frenzy. As the European and British economy weakened, USD rallied initially and touched one year high against major currencies ( Euro peak of 1.61 to trough of 1.38), GBP ( peak of 2.12 to trough of 1.73) , Australian Dollar ( 98 cents to 77 cents) only to now give back sizable chunk of gains. For a period, I was thinking, bad days of USD are over and we can steadily improve from here. I hoped with a new President elected in November, who can presumably reign in deficit and bring our troops home, USD can get some of its shine back. Guess not! Seems like we are in for some more pain! Euro is now back to 1.48 after rallying some 4 cents in one single day! GBP is back to 1.85 and Australian Dollar is nearing 84 cents, go figure!
Currency Markets are not the only one undergoing price swings, same deal with the precious metal markets. Silver sold off from a peak of $21/oz earlier this year to $10.20/oz recently destroying many commodity long funds in the process only to rally back to $13.75/oz in few sessions. Similarly Gold Nosedived from 1025/oz to $730/oz and back to $915/oz in few sessions. Same deal with crude oil, from $147/ barrel to $90 / barrel and back to $122/barrel.
In bonds market, long bonds ( 30 year treasury) rallied almost up to 124.00 and 10 year notes to 119.5 before selling off fiercely to 116 on long bond (a move of approximately 80 basis points in terms of the yield curve) and 114 on the 10 year notes. Same deal with stock market, one day up 400 points DJIA (Dow Jones industrial Average) on bailout news, next day 400 sell off on Democratic party hurdle to bailout efforts. In this atmosphere it is very easy to get whipped both ways, and cash seems like the best position to have. I interact with other professional Money Managers and talking to them it seems like this market has amazed every one! To quote one of my Mentors in the field – she looks at the volatility and says, gosh in this business, never say never, no one could have foreseen such a wild volatility! well said, as a testimony to that I saw HSI ( Hong Kong) sell off to 16.5k from 19.5K in 2 days and then back again to 19.5k. Some of this volatility is going to take its toll and I am thinking some of the weaker hands in fund management business will close their door. You need ultimate risk management to survive in this environment! Additionally one needs to adjust position sizing to account for this increased volatility. As the volatility goes up, options premium shoots up ( a good measure of option premium is the VIX index, also called the fear index which has spiked from a low of 10 in beginning of 2007 to north of 30 today), ATR (Average True Range) shoots up. A good risk management strategy in such an environment would require reducing position sizing proportionately ( in other words reduce the leverage) so that total amount at risk stays constant. The money spent to manage risk should be treated as an investment in long term financial health and not to be fretted upon. It is OK to get whipsawed in this market every once in a while, you can still survive, but not OK to let go of risk control and ride the volatility all the way up and down! Hope this volatility, as it enters the history books, will serve as an eye opener for the money managers and we all can learn a lesson or two in risk management!!