My musings on the economy, life, technology, business and things I find interesting.

Friday, June 6, 2008

Blood was in the Streets Today

The blood was running thick on Wall street today, a 3.13% drop in the Dow and 3.09% drop in the S&P 500, thus cancelling out most of April's and May's rally in one fell swoop (chart below shows today's close taking us back 2 mos). Intimidating indeed!

Tumultuous times to be an investor long in the market. As I've stated I've been market and US dollar neutral for a while so today was more fun then anything, even did some shopping. Been liquidating since late April, with a final push of sell orders yesterday, the cash was moved into gold, silver and some select income trusts. Choice shorts, namely SDS and XLY were executed in parallel as well as selling Sept SSO and SPY calls deep into the money, they are still in the money but only slightly so and showing fat gains.

Oil was hitting new records and tensions continue with Iran. If the US goes to war, either alone or by proxy oil will probably go over $200. US unemployment is soaring and if you include reduction in hours, people who have given up and others who don't show up in the official stats unemployment could be over 10% in the US. Even the official stats coming out don't point to a booming economy let alone what's hidden under the covers. It will be interesting to see how puts are trading on Monday.

The markets look a bit indecisive at the moment and have for at least a month, good time to be defensive, if the S&P drops down to 1150 you'll wish you were. The market is supposed to be an efficient predictor of value, yesterday and today's action make that notion seem ridiculous, the market is emotional in the short term and intelligent over time. As an investor you should take advantage of Mr. Markets mood swings, just remember he still is a pretty smart guy and could easily take you for a ride.

I want to write some pieces on determining when to buy and sell, I think most people are without any semblance of a framework for determining when to buy and sell, how to determine good value or what margin of safety is. If you don't understand basic valuation you risk not seeing your money grow for decades (because history has shown that it happens when markets - tech bubble, sectors - financials, commodities - 80s Gold and individual stocks - Enron/Nortel crash).

If the markets do crash are you fully invested or do you have cash on hand to swoop in and go shopping?

Were the last two months the eye of the storm for US markets? If they were, are you ready for a major crash? What about Canada, our markets are up big time, with the US slowing do we just have further to fall? Can Canada decouple?

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