Took losses on currency positions

I lost on the breakout of the EUR at 1.40 and Pound at 1.60. Still holding due to a correction. The medium term timing is still good, but the short term timing is horrible.



Here is a technical analysis of the S&P 500 index in the 2002 bear market. I still believe this is a bear market. Essentially our plan is to add to the SPY shorts when it crosses the 200 day EMA. If it goes down, hold on to positions until you get high volume sell-offs. The RSI has to be below 30 for at least 3 days before closing the shorts in a defensive fashion. Maybe then, consider going long on to profit from a bear market rally.





For a trip down memory lane, I'll let Robertson Morrow describe the 2002 situation:

In mid-2001, as recession hit, the stock market wobbled. From April to September, the S&P 500 fell 30%, but September 11th masked the downturn. Easy victory in Afghanistan and no further acts of mass terrorism reassured Americans. By March 2002, most believed that we had conquered the recession. Magazines and newspapers headlined the triumph, and the Dow reached almost 10,600, just 10% off its January 2000 peak. But the victory was an illusion based on foreign money. In April 2002, the dollar began to break, falling more than 15% in four months, and the stock market followed the dollar down. By July 2002, the market had lost almost 30%, and Americans began to turn pessimistic. The late bubble was over.

http://www.amconmag.com/article/2002/nov/04/00014//

Peter Thiel is right; we are in a government bubble. (And I am saying this as person who leans Social Democratic)... I suppose we would be near a top when people actually believe the stimulus and Bernanke's printing is working.

Currency 5/28/09

initiate

+USD/NZD 30 1.6040
-GBP/USD 30 1.5965
-EUR/USD 30 1.3984

I'll close the yen usd position at a small profit of .5%.

I hate all of the fundamentals on NZD, GBP, and EUR. Also they are technically overbought as they are both their 20, 50, and 200 day EMAs and have RSI of around 30 for NZD, and GBP has an RSI of about 77. EUR hit 70 on the RSI. These trades are doubles, not a home run trade; so closing them will require some defense. If the yen weakens to 99 yen per dollar (100 yen seems to be the resistance for USD/JPY), the trades will be closed and the respective currencies would be shorted against yen. SPY short is a home run trade. I'll wait for it to hit the 200 day EMA and have an RSI of at least 64. When the S&P 500 feel in April of 2002, it did cross the 200 day EMA, but it hit an RSI of 65. It didn't hit 70.

(I am not going to count the GBP/JPY against me(I knew it would go wrong when I made it as it was at 149 before, and it fell to 144.2; it didn't seem like a good risk/reward then and I acknowledge whipsaw). I saw Clarium's portfolio, and I saw they had a large currency position. I felt that I wasn't being too aggressive when I called it. The SLV position would be a big winner (about a 5% gain), although this would be moderately offset with the German bond losses (about 2%) and the pound dollar (about 1.6% and .9) , and the loss in the gold short (.7%) and copper (.7%). I am not counting it as it just stupid; I did it because I wasn't in positive territory. Let's say that I am down 2.3% now since I lost 4% in march gained 3.2% in april and lost 1.6% in may.)

Approxiamate portfolio:

- SPY 30
+ PBR 5

+ Silver 20

+ German government bond 10 year 70
+ US Treasuries 10 year 70

- EUR/SEK 30
- EUR/AUD 5
- EUR/USD 30
+ NZD/USD 30
- GBP/USD 30

Long treasuries

I would long 10 year Treasuries at 3.69% yield. 70% of NAV/

I would probably close at 3.40%.

I also fucked up on the German government speculation... I should have shorted Treasuries as a hedge. I didn't know how correlated (in the short term) that the euro-zone bond market is with the American bond market. I do not regret it, but I just want to forget the GBP/JPY position. I even knew it would whipsaw against me. (The GBPUSD at 1.52, I thought it peaked then. )

Starting with a clean slate

I want to end the experiment and start over...

I even knew that the GBPJPY would go against me in the short term lost about 4.5% on that, and an additional two percent. I should do a more rigourous technical analysis. Close yen positions just to reduce the pain. Losing makes it harder to gain loses since you have to be more defensive.

I want to reset at zero now. Starting at March was a bad time to start this. Maybe now would be a better time. The short treasury/long dollar bets were badly timed.

Regarding my views in the economy (long story short): there are no more shoes to drop, the financial sector is stabilized. Stocks are "fairly priced" at a "headline P/E" of about 15. I still think going short has a better risk/reward for going long, since it is unlikely that asset price inflation would continue so the p/e wouldn't rise much. Increased profit margins would increase share prices, but I do not see that happening. Since during bear markets, rallies do not have enough energy to break the 200 day EMA resistance. That would be a good time to increase short positions especially if the relative strength index (14 day) is at least 65. An equity sell off would simply occur not because it is raining shoes, but merely because of the epiphany that it is an L-shaped recession not a V or U shaped recovery.

I expect the deflation trade to resume later, but everyone is talking about being bearish on Treasuries, not German Bunds. However, they sold off too. I guess other European nations selling bonds put upward pressure on their yields in addition to government deficits around the world.

Current opinions:

GBP/USD - bearish (USD is moderately oversold and mainstream opinion is against the dollar now/ pound is moderately overbought)

German government bonds: moderately bullish

oil: slightly bearish

copper: slightly bearish

US equity market: highly bearish

Treasuries: neutral short term and long term

Currency positions where all losers

I am going to close the GBP/USD and have a total loss of -1.4% from it.

betting against sterling 4/14/

add

-GBP/USD 40 at 1.5219

4/14/09

Add 80% of NAV to the -GBP/yen position. It will become 90% of NAV total at 144.20 gbp per yen. We could have staying power here. We have to take some of the negative volatiility. I should have been more aggressive earlier though. This is one occasion where whipsaw can happen, but we need staying power. I am sticking with this despite any negative volatility. I need to erase the loss from Bernanke's guillotine. I should use gold as a hedge when actually longing the dollar. Let that be a lesson for me.

Close -EUR/CAD (opened month at 1.5703 euro for c dol and closed at 1.5925) and -USD/SEK opened at (8.0365 dol per sek and closed at 7.9365)(a small gain) together they cancel each other out since SEK had about a 1% gain, and CAD had about a 2% loss.

Close JGB short (it gained only a bit, like .16% to the portfolio. it went from 1.40-1.44% in yield.)

Portfolio (8 positions/ 2.55 : 1 leverage)

Equities (35%):
- SPY 30
+ PBR 5


Currencies (130%):
- EUR/SEK 25
- EUR/AUD 5
- USD/JPY 10
- GBP/JPY 90


Fixed income (70%):
+ German government bond 10 year 70 (currency hedged)



Commodities (20%)
+ Silver 20

Closing equity longs

Sell XLY (24.17) and XLP (22.66) and go short 30% SPY at 92.20.

Let's say that the gain from those longs resulted in a .4% gain when realized, turning the 1.3% loss into a .9% loss.

SPY could surge to $97.50, but if it does open higher on Monday for some reason, then we will add to the shorts. Based on yesterday's intraday trading and today's secession, I suppose, $92.50 is a strong resistance for SPY and the general equity market. I am comfortable with the short positions, even if it does break resistance. If the shorts move against me, I am more inclined to add.

I am calling a top now. Better than my $89.50 entry point.

Portfolio (10 positions/ 2.25:1 leverage) (approximate)

Equities (35%):
- SPY 30
+ PBR 5


Currencies (65%):
- USD/SEK 10
- EUR/SEK 25
- EUR/AUD 5
- EUR/CAD 5
- USD/JPY 10
- GBP/JPY 10
(consider building larger currency positions [short GBP and NZD against yen especially pound] first)

Fixed income (110%):
+ German government bond 10 year 70
- Japanese government bond 10 year 40
(consider a small long position in 10 year Treasuries)

Commodities (20%)
+ Silver 20
(prepared to short oil and copper

new currency positions

My views on currencies

I think there will be a new paradigm: GBP and USD are the preferred funding currencies for carry trades instead of JPY. Bernanke is going to keep interest rates at 0 for a long time. However, because of the balance sheet recession and many companies trying to delever loans dominated in dollars which would push the dollar up. This would not happen for GBP, thus I am more bearish on it.

I am no longer bullish on the dollar anymore. I do not like longing it because of Bernanke's guillotine. The silver longs will protect us from any currency devalution.

Regarding Euro, 1 euro for 1.33 dollar doesn't price in the guillotine effect. It is not that expensive, and I do not want to short it.

My current hierarchy for ZIRP currencies:

JPY > USD > GBP

We are going to start small with these new positions:

- USD/JPY 10 (at 99.2 yen per dollar)
- GBP/JPY 10 (at 148.9 yen per pound)

Diversification is not part of the equities strategy. The equities strategy could be summed up as "short beta" and maintain a token long on PBR. Short an index or an ETF is the simplest way to express this view. Regarding sectors I am most bearish on XLY and XLF. Besides sector ETFs and SPY are largely diversified too.


Portfolio (12 positions/ 2.1:1 leverage) (approximate)

Equities (20%):
+ XLP 10
+ XLY 5
+ PBR 5
(XLP and XLY will be removed tommorrow: it is imperative that I build up large short positions before the real sell-off)


Currencies (60%):
- USD/SEK 10
- EUR/SEK 25
- EUR/AUD 5
- EUR/CAD 5
- USD/JPY 10
- GBP/JPY 10
(consider building larger currency positions [short GBP and NZD against yen especially pound] first)

Fixed income (110%):
+ German government bond 10 year 70
- Japanese government bond 10 year 40
(consider a small long position in 10 year Treasuries)

Commodities (20%)
+ Silver 20
(prepared to short oil and copper)

Time to get extremely aggressive

On Friday I will close XLP and XLY and go short SPY (30% of NAV). Also adding to the 10 year German Government Bond long position would be good too. If have more conviction short the more volatile XLY, XLF, and IWM (Russell 2000). Closed gold shorts at as small loss... (I am wrong on the assumption of a short-term sell off.) I am moderately bullish on it in the longer term, although more bullish on silver. The equity longs are too risky, although I love PBR. As seen today, the market is extremely frangible as it opened up higher and then there was a large sell-off. I'll attribute it to profit taking since the reported stress test results aren't that bad.

These last months have been frustrating. I will not use the dollar anymore. That is a bad idea. I'll use FX crosses to bet against GBP, EUR, and NZD by focusing the longs on the yen. That printing press is a potential guillotine for speculators. Bernanke is the main reason the real-time experiment's portfolio is slightly negative since the start of this experiment. I lost 6% in one day (March 18) about 3.5% on currencies (long dollar) and 2.5% on bonds (short 10 year) because of Bernanke's announcement. Fortunately, it was mitigated since I correctly called the bear market rally, and my longs on CAD/SEK/AUD vs EUR made up for that. Bernanke's announcement ruined my psychology, forcing me to be more timid, and it made it harder to dig out of losses.

Now, one has to be aggressive by going short regardless of the short term losses. Is he going to print money to buy equities now? (Is he going to create the "Taxpayer Assurance Equities Facility") Fuck you Ben. There has to be a time to go massively short and then shutting the fuck up instead of being concerned with short-term market moves. The bear market rally is about to end.

I did not anticipate the equity market rally fast enough. When I did put on the positions (and by attempting to cover the SPY short), the market already open up high, just when I anticipated it. This frustrated my as my speculative equity longs (I most certainly do not believe XLY is worth buying; I bought it solely on the proposition because I expected others to bid it up too.) Those positions were badly timed (although correct) given that the portfolio is holding risky long positions and it did not receive gains because I was too slow in closing the SPY short to profit from a short term trade.

So add to German government bond long by 20%: (3.38%)

The 10 year German bond bet did miserably today as its yield went up by 13 bp (which corresponds to a 1.2% loss (.5 x 1.2= .6%)). I still have conviction with that position and I am not tempted to close, but I currently did not know what caused the sell-off except that there was a sell-off in US Treasuries. There was no corresponding sell-off in Japanese bonds though even though the Nikkei 225 is doing well, so the loss wasn't off set with the Japanese government bond short.

http://www.bloomberg.com/apps/news?pid=20601009&sid=aEUEP4YoLxbU&refer=bond

I am still treading water. I am down 2.3% since initiation.



Total profit/losses:
-.9% + USD/GBP (closed May 4)
-.7% - Copper (closed on May 1 [0.035 x .2])
-.65% - Gold (closed .25 x 0.025)
-.6% + German government bond 10 year (open 1.2 x .5)
+1.5% + Silver (open .2 x 0.075)

-1.3%

Equities and other currencies were a wash. Losses on SPY short offset gains from longs.

Remember, the question is the timing. I am more confident about the direction.

Approxiate portfolio:

Portfolio (10 positions/ 1.9:1 leverage) (approximate)

Equities (20%):
+ XLP 10
+ XLY 5
+ PBR 5
(XLP and XLY will be removed tommorrow: it is imperative that I build up large short positions before the real sell-off)


Currencies (40%):
- USD/SEK 10
- EUR/SEK 25
- EUR/AUD 5
- EUR/CAD 5
(consider building larger currency positions [short GBP and NZD against yen especially pound] first)

Fixed income (110%):
+ German government bond 10 year 70
- Japanese government bond 10 year 40
(consider a small long position in 10 year Treasuries)

Commodities (20%)
+ Silver 20
(prepared to short oil and copper)

5/05/09

Add SEKUSD 10 NAV

Portfolio (11 positions/ 2:1 leverage) (approximate)

+ XLP 10
+ XLY 5
+ PBR 5

- USD/SEK 10
- EUR/SEK 25
- EUR/AUD 5
- EUR/CAD 5

+ German government bond 10 year 50 (consider adding) (it is now at 325 bp)
- Japanese government bond 10 year 40 (consider adding)

+ Silver 20
- Gold 25

Portfolio is lightly levered 2:1 and with moderate risk. Portfolio composition and risk was chosen due to lack of conviction. 90% is in goverment bond positions which isn't that volatile, while 45% are in a commodity bet that largely offsets each other, 45% is in currencies and most of that is in EUR/SEK as they have a somewhat high correlation, and 20% is in equities with PBR and XLY being the most volatile.

5/4/09

Close sterling short. Lost a lot. (2.75%) (1.495/1.455). Expecting a breakout.

close gold position (lost well, I longed it at $940 and it is at $892), keeping silver position, and remove SPY short (all of it). Let 5% PBR and 10% XLP and 5% XLY ride.

Currencies:

Shorting gold 25% NAV. ($892).

April:
Was up about 3.2% on currencies (0.024 from SEK/eur x 25 + 0.045 x .25 CAD/EUR + .04 x .2 AUD/EUR + 0.55 x .3 SEK/JPY - .5 X 0.018)

GBP ended month at $1.482

Lost nothing from silver due to silver price increase in commodities and didn't lose any on copper until start of the month. Lost slightly on gold too. Copper lost about (3%) in may.

Equities were neutral.




Portfolio (lightly levered and "low risk": do not have enough conviction yet):
+ XLP 10
+ XLY 5
+ PBR 5

- Gold 25 (short term trade)
+ Silver 20

+ German government bonds 50 (currency hedged)
- Japanese government bonds 40 (currency hedged)

- EUR/SEK 25
- EUR/AUD 5
- EUR/CAD 5



Planned portfolio using deflation thesis (4.75:1 leverage, 15 positions) in June:

Equities (80%):
- SPY 40
- IWM 20
- DAX index 20

Commodities (40%):
+ Silver 20
- Copper 20
(maybe oil if contango is still very large)

Fixed-income (230%):
+ 10 year Treasury 150
+ 10 year German Government Bonds 80

Currencies (125%):
- GBP/JPY 40
- GBP/USD 10
(50)
- EUR/JPY 25
- EUR/USD 5
(30)
- NZD/JPY 15
+ USD/NZD 5
(20)
- EUR/SEK 25

Wealth is a zero-sum game

http://www.kellysite.net/3cw.htm

Not all of economics involves zero-sum games. But most economic processes (~85-95%) are zero-sum or negative sum and almost all (> 99.9% aren't pareto efficient). Hopefully, around 15% is at least Kaldor-Hicks efficient.

How asset price inflation is a negative sum game.

This is written from a late 1990s perceptive from an American liberal's point of view.

by Charles M. Kelly:

Conservative damagogues like Limbaugh have been able to convince the public that the huge incomes of the wealthiest Americans are irrelevant to those who make moderate-to-low incomes. They even suggest that the more money the wealthiest Americans make, the more wealth will trickle down to the lower classes.

If you've swallowed this line of conservative garbage, get ready to vomit. As all conservative economists know, and deny to the public that they know, wealth is a zero-sum game. That is true at both the front end—when income is divided up, and the back end—when it is spent.


The Front End of Zero-Sum: Dividing the Loot
There is only so much corporate income in a given year. The more of that income that is used to pay workers, the less profit the corporation makes. The less profit, the less the stock goes up. The less the stock goes up, the less the CEO and the investors make. It’s as simple as that. Profit equals income minus expenses. No more, no less. Subtract the right side of the equation from the left side and the answer is always zero. Hence the term, “zero-sum.”

So, to the extent a corporation can keep from sharing the wealth with workers—the ones who created the wealth to begin with—investors and executives get a bigger slice of the income pie and become richer.

To understand this aspect of the zero-sum nature of wealth, and the way many people get rich—that is, besides selling-out our workers to Third World countries—consider how Gates, Eisner, and Welch Jr. did it. It’s no mystery, and it isn’t all that hard to do.

Although the following specific details are fictional, the scenario is accurate. Through their emissaries, Mr. Bill Gates (CEO of Micro- soft), met with Michael Eisner (CEO of Walt Disney Corp.), and John Welch Jr. (CEO of General Electric). Their discussion went like this:

Gates: “Gentlemen, you astute, wise, talented, outstanding, and morally principled managers of today—I can sell you something that cost me $10 per unit to produce for $400 each. It’s a little disk with a bunch of zeros and ones on it.”
Eisner and Welch Jr., in unison: “Why in the hell would we be stupid enough to do something like that?”

Gates: “Simple. It will enable your secretaries to produce twice as much work in half the time. In other words, you can fire half your secretaries—those who helped make your organizations successful in the first place. And the secretaries who remain will still work the same hours for the same pay. You will cut your labor costs in half, the stock of your companies will skyrocket and your grateful shareholders will reward your managerial brilliance by making you incredibly, fabulously rich. Not like me, of course, but pretty damn rich.

“Here’s another wrinkle you’ll love. When your companies start growing again, Disney will hire the experienced secretaries that GE fired, and GE will hire the secretaries that Disney fired. Since they are new employees, they’ll start out at base pay, which has hardly budged for the past 20 years—and with no benefits. Times are tough for secretaries these days, you know, with the corporate downsizing and all.

“Oh yes, with Republicans in control of Congress and Clinton ap-pointing conservative judges to the courts, you can work your secretaries’ asses off, and you don’t have to worry about them getting carpal tunnel syndrome and suing you.”

If you think that this scenario is far-fetched, read what Barron’s had to say about “What’s Behind America’s Trend Towards Widened Income Inequality?”:

The revolution in office technology has broken the back of the market for secretaries and clerks. Robotics has destroyed whole categories of factory work. These seismic shifts have meant that millions of people who might otherwise have gotten the blue- and pink-collar positions in these sectors must now chase what jobs remain. And an in-creased labor supply generally brings a lower wage. (Oct. 26, 1998, 55)

Two simple questions: Who got most of the benefits of all this new technology? Who made all the sacrifices? It was no accident. It was a matter of naked greed combined with raw political and economic power. When those with the power divide up the income that workers generate, it’s a totally zero-sum situation.

The same kinds of discussions occur daily in our major corpora tions, dealing with issues from outsourcing work to temp organizations, to closing down U.S. operations and moving overseas. When Michael Eisner insists that his suppliers use sweatshop labor in third world countries like Haiti, Burma, China, and Indonesia, he’s not “creating jobs for women and children.” He’s forcing American manufacturers to abandon their communities and workers so that labor costs will go down and he will get a bigger share of Disney’s income when it is divided up at the end of the year.

In exactly the same way, when John Welch Jr. forces his suppliers to abandon their communities and unionized American workers to go to nonunion Mexico—just like he has done with his own GE workers—he’s not “creating jobs”; he is reducing labor costs so that he will get a bigger share of General Electric’s income when it is divided up.

The people who divide up the spoils in this class war are the CEOs, investors, investment bankers, accountants, lawyers and general hangers-on who are associated with the power centers. They negotiate among themselves over who gets how much of the available money—a finite amount. When the feeding frenzy is over, the workers get what’s left. If they’re in a third world country, and if they’re lucky, they may get subsistence wages. If they are Americans, and if they are lucky, they get an opportunity to find another job, usually at lower pay.

The barbarians of antiquity at least had to work to earn their living. They rode horses in the snow, rain and mud, and used swords, spears, and arrows to destroy families and communities. Today’s barbarians have it much better. They destroy families and communities by pitting workers against each other, and they can do it by using their telephones—and they don’t even have to leave their comfortable air-conditioned offices.


The Back End of Zero-Sum: Spending Income
Since we live in a society of auction markets, the more money other people have, in effect, the less you have. Even The Wall Street Journal recognized this patently obvious fact in the previously referenced article, “Wealth Gap Grows…”:

A growing disparity in affluence can hurt the less well off, even if their incomes are also on the rise. In the San Francisco Bay area, where stock-driven wealth exploded in the 1990s, a middle-class family earns about 33% more than the national average—but has to pay up to four times the national average to buy a home because of intensely competitive bidding from freshly minted millionaires.…
Cornell University economist Robert Frank argues that Silicon Valley could, as it has in so many other ways, be foreshadowing a national trend. From bigger cars to higher tuition for the best schools, the richer rich will ratchet up prices for everyone else. “Extra spending at the top,” he says, “raises the price of admission.” (Sept. 13, 1999, A1)

It’s got to the point that even professionals like doctors and lawyers are sometimes being priced out of the kind of lifestyle they’ve grown accustomed to expect. Fortune reported that real estate prices in the San Francisco area have escalated to the point that “it has gotten so bad that well-salaried professionals without big options packages—even doctors and lawyers—simply can’t compete.”(July 19, 1999, 27) They’re being out-bid for traditional doctor/lawyer-type homes by the newly created multi-millionaires of the computer industry, who don’t even have to bother applying for a mortgage. They pay cash.

The land-grab that the Journal and Fortune were referring to here is actually old hat. Back in 1993, Newsweek called the zero-sum nature of land and housing “Aspenization”:

A town [Crested Butte, Colorado] with such attractions is a natural target for what people in Colorado call Aspenization: the upscale living death that fossilizes trendy communities from Long Island’s Hamptons to California’s Lake Tahoe. Aspen was a splendid place, too, before it was discovered by the rich and famous—and the greedy and entrepreneurial. Now it’s a case study in over-development. Its lavish second homes sit empty for most of the year while three-quarters of the work force, who can’t afford to live there, commute from forty miles down-valley—a two-hour trek at rush hour. (Dec. 27, 1993, 45.)

Similar situations are occurring all over the United States. People who do the service jobs along the North and South Carolina coast have to commute by bus 2½ hours each way to work. They can’t afford the rents that have risen because the wealthy bought up available land and cheap homes, and replaced them with expensive homes, if not mansions. Even the city of Branson, in the formerly remote hills of Missouri, had to build dorms for workers, because they could no longer afford the rents in the area after it was discovered by America’s high-income earners.

It’s not just in resort areas that low- and middle-income persons are feeling the pinch. From the mountains of Arkansas to the deserts of New Mexico, people are finding that a massive land and property grab has accompanied the huge increase in wealth of America’s royalty. Even The Wall Street Journal expressed surprise at the rise in housing costs across the country in its article, “3BRs, 3 Baths, No Vu. Price: $500,000”:

What Can Half-Million Buy? Not Much, Even in Fargo

…Weekend Journal recently went on a cross-country house-hunting tour, and we were amazed to discover how extensive and widespread the price increases have been. It wasn’t just the usual realestate nightmares such as Manhattan and Silicon Valley. In states from Oklahoma to Minnesota, we found half-million-dollar listings that upscale buyers only recently would have viewed as “starter homes.” (Sept. 10, 1999, W1.)

This kind of problem is going to spread in ways most people have not foreseen. In its article, “No Inflation? Look Again; It’s confined to stocks today, but it will spread,” Barron’s warned its readers that

Rising stock prices will inevitably lead to rising prices in the rest of the economy….
Since much of the newly created money has gone into the stock market, stock prices have been bid up to astronomical levels relative to prices of other goods in the economy. Consequently, by selling some shares, stockholders have a great and growing ability to buy consumer goods, such as homes and automobiles. (Nov. 15, 1998, 58.)

This warning is not often heard by those who have been conned into believing that everyone, even those who don’t own securities, will benefit from a soaring stock market. And those who feel good about their $2,000, which grew to $4,000 in the stock market, had better get a grip on reality. By today’s standards their $2,000 gain is a minuscule amount, and they’re eventually going to lose most of it to those who really made money in the stock market—or to those who are going to inherit massive amounts of profits from the stock mar-ket. When the wealthy start seriously buying up everything in sight, especially land and homes, low- and middle-income Americans will suddenly discover what the skyrocketing stock market was really all about.

This kind of economic reality doesn’t hurt just poor people. The Wall Street Journal reported that even some “rich” people are being priced out of the market for the summer vacation rentals they’ve been getting in the past.8 For the summer of 2000, it will cost $20,000 for two weeks in a cottage in Nantucket, a 25% increase over the previous year. In Martha’s Vineyard, it’s $3,000-5,000 a week for standard cottages. It’s been estimated that the price for vacation rentals nationwide rose 18% in 1999, after rising 11% in 1998.

So, as the rich get a lot richer—and your increasing income doesn’t keep up—poverty trickles down to you. You get priced out of the markets you have been able to enjoy in the past.

Similar observations could be made about college tuition, quality health care, meals at restaurants, automobiles, entertainment (from movies, plays, and concerts to professional sports events), and on and on. The same problem exists for virtually every aspect of life in which people must work in order to participate in auction markets. It even carries over into recreational opportunities and discretionary time with one’s family, since people are forced to work more hours to keep abreast of rising prices.

Naturally, members of our new American royalty fully expect themselves and their descendants to stay ahead of the game and to continue to afford all the luxuries of modern life, and in unlimited quantity. Their supply of money will require high profits for corporations, investors and businesses—and low wages for workers—for as far into the future as we can see.

If you now live in a $200,000 home, drive a modest car, eat at home, never take vacations and plan to send your kids to a state university—and are satisfied with your life and don’t desire any more—you may think that the inflation described above won’t affect you.

Wrong. Remember: the writer of this book, the doctor you go to, the professor at your local college, your lawyer, the local pharmacist, your state senator, the managers and owners of your insurance company, grocery store, theater, hardware store—ad infinitum—they have been infected by the greed and materialism virus. In its article, “Amid Economic Boom, Many of the ‘Haves’ Envy the ‘Have-Mores,’” The Wall Street Journal described how our greediest Americans are driven to become even richer:

As the job market surges and the stock market has boomed, a wave of envy is gnawing at those near the top of the economic pyramid as they see others making even more….
Even some of the newly envious feel vaguely guilty about it. But they are rankled nonetheless, especially when they compare themselves to neighbors, college classmates and former coworkers making far more in high tech, Wall Street, or as entrepreneurs. (Aug. 3, 1998, A1.)

The only way these envious people are going to realize their dreams of a royal lifestyle is by charging you more for the products and services you must have. And if they have the power to pull it off, and you are powerless to stop them—count on it—they will. And the additional income you work for in the future will buy less than your present income buys today.

5/1/09

I have three trades that I have a strong conviction on...

Short SPY (and possibly IWM later), long US 10 year bonds (didn't put this on yet), and long German 10 year bonds. These trades require one to have a long time horizon and I am nervous about the timing of the former trade. Even people who are agreeing with me that this is a bear rally scares me. I know I am right about the future direction of the equity markets, but one does not outperform when others agree with you.

So on Monday, I expect the market to open lower and that would be a good time to by 10 of NAV of XLP and 5% XLY. These are short-term hedges to the SPY short (i.e. SPY short should not be considered a hedge to the SLP and XLY longs) and I believe XLP would decline less during a dramatic sell-off when compared to SPY. I also expect most short term traders would buy on Monday to give the bear market rally more steam. These are regretably, trades, as I plan to dump them as SPY hits new local highs by the end of the week. The timing is done to reduce risk that the longs would offset the gains in the SPY short. The trade is risky because I love the SPY short, and those long positions would not allow one to realize the gains in the SPY short because one is using a "market-neutral" strategy.

I would not add to my short position yet. I'll let the market move against me initially.


Edit: copper will rise today, but it will sell-off on monday.

Edit2:
Go long on XLP (10%) and XLY (5%) today. I think market will open higher on Monday. Copper will probably rise on Monday. Gee... this diary is forcing me to criticize myself and vacillate.

The copper positions have to be closed. Take the damn loss at $2.12 (3.5%) because I could imagine a scenario where it could go higher. You're wrong, and just admit it. (I am talking to myself). It could go higher than its recent high of $2.20. Sterling will be closed at loss on Monday. Short copper might be attractive position if the futures curve is in contango as it was backwardated recently. Short oil seems to be good too. I'll keep silver long though.

I expect the bullishness to continue. I am a short term bull now, but this market is stressing me out. It is forcing me to think like a trader and contradict myself.

I'll use bond and commodity market indicators as proxies for bullish sentiment in addition to equity technical indicators. It is much like organic chemistry: how do you interpret these peaks? (a reference to IR and NMR spectroscopy) What does the market tell us and what is priced in? I should look at the futures curve in base metals and see if it is in contango. Contango can be interpreted as inflationary expections/and or a sign of economic recovery. I like the 5 year bond yield as another indicator since it reflects investors' estimates of their return on investment for that period of time. It is currently at 204 basis points. It should at least break the Feburary 26 highs of 207 basis points, although 220 basis points would make a short position in SPY more attractive. Also, the spread between TIPS and the bond of the same maturity can be used as a nice inflation expectations indicator. (The 10-30 year bonds might have a catastrophe premium to it such as pricing in hyperinflation or a debt default which could explain the extreme steepness of the yield curve.) However, TIPS have a liquidity premium attached to it as the market is less liquid, but I expect liquidity would increase in this market (at least for the short term.)



The commodity market at least has some hedgers in it so it conveys some useful information. The bond market, unlike the equity market, has a higher barrier for entry. Bond traders have longer time horizons, and the market is not dominated by trend following traders. There is also less upside in the bond market, so they are not motivated by status concerns such as wanting to brag about a position that went up 100% at a cocktail party.