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.

I wish I did not had to choose this topic for my blog, but that is not going to change the sad reality that’s out there! On breakdown of 12k level on dow we have taken a quick 1000 point drop as I had feared in my previous blog here two weeks ago. What is amazing is that even this 1000 point drop is hiding a lot of ugliness in wall street. The 8% or so drop in dow is nothing in comparison to the hit financials stocks have taken in last few days. These stocks are down ranging anywhere from 25% to a mind blowing 70% in just couple of days- notable examples being the government supported Freddie Mac (FNM) and Fannie Mae (FRE) and Lehman Brothers (LEH). LEH dropped from $22 to $14 in matter of two days, this too after having been consistently selling off for the last three months. At this rate, one wonders, is the end really near for Freddie Mac, Fennie Mae and Lehman? Bear Stern in the making? Actually some in the media are calling it “Bear Stearn squared” given that the total mortgage backed by Freddie Mac and Fannie Mae is of the order of 5 Trillion dollars, any government sponsored bail out plan will further put the US government in deep deficit, potentially killing the US dollar further and rasing the interest rates. Actually the US bond markets also sold off fiercely on Frinday fearing a downgrade of US givernment debt from a AAA rating (source-Bloomberg)!

The Friday sell off started after a report form New York Times the previous evening that the governemnt is thinking of nationalizing the two entities (FNM and FRE) and share holders are likely to lose all their equity( read share prices will go to zero). The stocks opened 40- 45% down next morning after being down 25% the previous few days. The investors got clobbered, including yours truly:-(

I had a decision to make on the financial stocks I had in my portfolio, hold or dump? With the help of options I had been able to hedge my exposure to certain extent, but 45% down in a day, my relatively simpler hedging in place is not designed to handle that kind of volaitility! Unless you forego all your upside potential as well, you can not create a hundred percent hedged poortfolio(Of course there are delta neutral strategies also but these require constant adjustment in the protfolio to make sure you stay delta neutral all the time, unfortunately I do not have that kind of time required to adjust my portfolio so frequently).. Later in the day the government ( read Treasury Secretary Paulson) denied the rumors and the stocks did recover some lost ground. I did what a sound money management program required me to do, I dumped half my portfolio on the bounce, stayed with half, so that if their is any upside I can still participate, but if they tank further, my exposure gets limited. No easy answers here.

I have seen liquidations in commodities, speculative high PE tech stocks, index futures, but not in so called value stocks- financials trading in PE mulitple of 4,5 and run by the top notch-know it all- ivy league investment bankers- that has to be a first! Really taken by surprise, a nasty surprise! Next time I get a solicitation for joining a class action law suit against these guys, guess what- I am going to join!

In the markets you never stop learning and that is why I like the markets! So old and yet so new, always changing, always challenging! Some characters in the market never go away, particulalrly the fear and greed element (and also hope which could be a disasterous thing in the markets, some stocks just never come back, think Enron and WorldCom). Right now there’s fear, there’s panic, but somewhere there is hidden opportunity as well. My job as a investor is to find that!Yep, the market has thrown a challenge, yes I am hurting in the short term, but it will go away in few days, I will get up and be back in the saddle! As they say what doesn’t break you, makes you stronger! I hope I ( and all my fellow investors) emerge out stronger after this crises in the credit markets and yes don’t forget “this too shall pass“!!

>
I wish I did not had to choose this topic for my blog, but that is not going to change the sad reality that’s out there! On breakdown of 12k level on dow we have taken a quick 1000 point drop as I had feared in my previous blog here two weeks ago. What is amazing is that even this 1000 point drop is hiding a lot of ugliness in wall street. The 8% or so drop in dow is nothing in comparison to the hit financials stocks have taken in last few days. These stocks are down ranging anywhere from 25% to a mind blowing 70% in just couple of days- notable examples being the government supported Freddie Mac (FNM) and Fannie Mae (FRE) and Lehman Brothers (LEH). LEH dropped from $22 to $14 in matter of two days, this too after having been consistently selling off for the last three months. At this rate, one wonders, is the end really near for Freddie Mac, Fennie Mae and Lehman? Bear Stern in the making? Actually some in the media are calling it “Bear Stearn squared” given that the total mortgage backed by Freddie Mac and Fannie Mae is of the order of 5 Trillion dollars, any government sponsored bail out plan will further put the US government in deep deficit, potentially killing the US dollar further and rasing the interest rates. Actually the US bond markets also sold off fiercely on Frinday fearing a downgrade of US givernment debt from a AAA rating (source-Bloomberg)!

The Friday sell off started after a report form New York Times the previous evening that the governemnt is thinking of nationalizing the two entities (FNM and FRE) and share holders are likely to lose all their equity( read share prices will go to zero). The stocks opened 40- 45% down next morning after being down 25% the previous few days. The investors got clobbered, including yours truly:-(

I had a decision to make on the financial stocks I had in my portfolio, hold or dump? With the help of options I had been able to hedge my exposure to certain extent, but 45% down in a day, my relatively simpler hedging in place is not designed to handle that kind of volaitility! Unless you forego all your upside potential as well, you can not create a hundred percent hedged poortfolio(Of course there are delta neutral strategies also but these require constant adjustment in the protfolio to make sure you stay delta neutral all the time, unfortunately I do not have that kind of time required to adjust my portfolio so frequently).. Later in the day the government ( read Treasury Secretary Paulson) denied the rumors and the stocks did recover some lost ground. I did what a sound money management program required me to do, I dumped half my portfolio on the bounce, stayed with half, so that if their is any upside I can still participate, but if they tank further, my exposure gets limited. No easy answers here.

I have seen liquidations in commodities, speculative high PE tech stocks, index futures, but not in so called value stocks- financials trading in PE mulitple of 4,5 and run by the top notch-know it all- ivy league investment bankers- that has to be a first! Really taken by surprise, a nasty surprise! Next time I get a solicitation for joining a class action law suit against these guys, guess what- I am going to join!

In the markets you never stop learning and that is why I like the markets! So old and yet so new, always changing, always challenging! Some characters in the market never go away, particulalrly the fear and greed element (and also hope which could be a disasterous thing in the markets, some stocks just never come back, think Enron and WorldCom). Right now there’s fear, there’s panic, but somewhere there is hidden opportunity as well. My job as a investor is to find that!Yep, the market has thrown a challenge, yes I am hurting in the short term, but it will go away in few days, I will get up and be back in the saddle! As they say what doesn’t break you, makes you stronger! I hope I ( and all my fellow investors) emerge out stronger after this crises in the credit markets and yes don’t forget “this too shall pass“!!