The Credit Crisis Financial Stocks Short Journal

Actually it wasnt the acknowledgement that was the contrarian piece, it was the removal of the 'The Committee expects inflation to moderate in coming quarters,reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization', as soon as they removed that bit about being bearish in commodities(In June 25 2008!), they went into a free fall
 
I increased the fed futures bet after the statement which was not as hawkish as expected(it was a bit hawkish but it seems that the market antecipated that and the contracts rose as a result)
Since the crisis began I had made a few big bets
-Short MBI(MBIA Inc, back when it traded at $33!) 10% of my networth, resulted in a loss of 2% as I covered when Warburg announced an infusion. That wasnt even much of a mistake, my mistake was not using puts with that 2%(making me immune to BS irrational rallies) that I lost, making 10x that amount easly. That stock is my nemesis, it seems that I NEVER time it right. It now trades at $5
-Short FNM FRE with about 10%. Went to $0
-Fed futures bet in late 08, that the fed would not raise, then that the fed would cut to either 0.5% or 0.25%. They went to almost zero. That made me 25%
-Heavy put buying in Mar/Apr in CRE, banks, airlines. Totally ill timed and cost me 20%. The mistake was the size of the position, not necessarily the position itself

And now
-Fading hiking expectations after the mother of all green shoots in early Jun. So far it has made me about 18% but I'm gunning for more. I'm only continuing to add as the position makes money(the Gartman principle), last week they tumbled and I contemplated cutting back but now they are back at a bit more rational levels.
 
Back in the black for the year. My fed futures position is making my PnL quite swingy. Yet I'm still considering more adds(you are supposed to add to winning trades right?). Of the few people whom I pay some kind of attention to their opinion who are saying fed raises(Alan Blinder, Gartman) are saying mid 2010 early 2010 respectively. Under these scenarios I dont stand to lose much if they do .25 in a 'measured pace'. I would only lose considerably under a 1994 scenario which Greenspan explained in his book.

They always waited for recovery to get going to start raising rates as a result they usually had to play catch up with inflation and this would lead to more tightening years later, that usually meant a recession would be triggered by the later hikes. In 1994 they tried a new approach and surprised the markets(specially Bob Citron) with antecipatory tightening, Clinton even mentioned to Greenspan years later that he was not happy with the hike because 'I just didnt felt like the economy had picked up enough for tigthening'. However 1994 conditions doesnt seem to resemble the current period in any degree. Inflation, credit, employment are all vastly different and it seems highly unlikely they will try to play around with monetary policy after the worst financial crisis since the 30's
 
Here's why I dont beat myself too much over my put buying in late Mar/Apr which resulted in large losses(But that never threated my networth considerably because with options you are paying someone to be your risk manager)
-The stock market is in a secular bear market(valuations tend to drift down, cyclical bull markets are shorter, cyclical bear markets are longer)
-Rogoff research indicates real stock prices take 3.5years to stabilize(thats late 2010 for the current cycle)
-The fundamentals didn't justify much higher levels for the S&P as earnings/revenues will be underpressure
-Financials wont make net money for more than 12 months(Heck, Bove is saying that same thing right now, and he is the bull)

So I made an odds play, I couldn't see any sustained rally looking at those facts,turns out that it was totally wrong, yet if I was correct I would have made multiples of my risk. Heck the only reason I'm not pilling in the same trade now is because of my position in fed futures otherwise I would be going for it again(although I still hold some shorts/puts). Vegas was built on a 1% edge. Shorting equities almost certainly have a much bigger edge at current levels in a 6month horizon
 
This might be a good guide for whats coming for US equities. Shangai Comp Index:
http://1.bp.blogspot.com/_eKH-tiSXFbc/SokeGNmZbGI/AAAAAAAAFpQ/B6WZvelKMys/s1600-h/shcomp.gif

Given this, if this futures sell-off persists through the opening I'm going to buy some financial puts and increase my bearish bet. My exposure is already large due FF futures but I just looking to increase it a bit as it looks to me the edge on shorting this market is quite large right now(worst two months sep and oct coming, bullishness is widespread, fundamentals suggest lower prices, lots of bad things not priced, rogoff research, secular bear,etc).
Tiger Woods choked again, now against some korean man who never won anything in his life. 3 bets against him 3 gains in a row
 
Interesting data from John Hussman
"Similarly, the price-to-revenue ratio on the S&P 500 at the end of recessions has been about 40% lower than it is today, and has been lower still at the actual bear market trough. The same is true of valuations in relation to normalized earnings, even though the market looked reasonably cheap in March based on the ratio of the S&P 500 to 2007 peak earnings (which were driven by profit margins about 50% above the historical norm)."

Since we are in a secular bear and currently see no profit growth(actually profit declines) we had a multiple expansion period, which is totally abnormal in secular bear. Normality should soon return and even though definitions of 'secular' bears/bulls are long-term themes, 'long-term' are nothing but a series of short-runs, therefore at any given moment(even at a minute level) the odds are that multiples will contract and currently earnings cant go up, that leaves PRICE to go down

The ES daily is posting a ridiculous engulfing reversal. Today is the day for the smart money to put their hedges and bearish bets. I would not be surprised to see S&P at 750 in the coming months
 
Whats the bullish argument for US equities here?Here are a few ones
-"Trendfollowing, this market has been going up and up, this wont stop now"
I cant much against this but this rally has beaten 1929-30, so its old and tired by historical standards, risk-reward is totally shifted to the short side even if some kind of last leg rally comes back for another month, one thing is sure this rally WILL end, unless the trendfollower is arguing for a stock bubble that will never end, which has never happened in the history of mankind. Everyday we get closer to the end and by historical standards it looks quite extended

-"A semi V shaped recovery could occur and the market could hold current valuations in the HOPES of a 2011 blockbuster GDP/profit year"
I suppose this is possible, but I'm not so sure human nature though will stand to be wrong about earnings and not junk the market as a result. Investors seem too short-termists to do that

-"Equities could became a bubble as Fed liquidity drives further gains"
I'm not sure what people mean by 'liquitidy', M1 M2 are not growing that strongly, bank credit is contracting(and standards tightened further), credit cards/lines are getting shutdown, unless you run a bank you are not seeing much liquidity

-A V shaped recovery will justify this market valuation. I addressed this one a while back, it looks pretty darn unlikely
 
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