Selling UUP

Everything moves way too fast this year. 10% moves of S&P in two or three days. Currency exchange rates go up or down 15 or more percent in couple of months. Great stocks drop 50% or more in a month. What do we do? We stay nimble.

I bought UUP in August and increased position in September to take advantage of rising dollar. Wanted to make about 10% in half a year or maybe a year term. It's up more than 15% in less than three months! Chart looked just too much parabolic until the end of October, and now it's range bound. Fundamentally, dollar should stay strong, but who knows, in this market. Today I sold UUP into strength.

Full disclosure: at the moment of publication author didn't have any positions in UUP. Positions can change any time.

Thinking Google

Was tempted by action on Google (GOOG) today. Price was down to under 310 at one point. Decided not to buy anyway, was scared by the fact that almost all technical indicators were bearish. In current market, if in doubt, don't buy. I know that Google is cheap under 500, never mind current price. But I don't want to buy when it can go even lower. Looks like we are in one of paradox situations described by Jim Cramer: hedge funds have to sell something to meet redemptions. And they sell what they can, not what they want. Google is one of the most liquid stocks, so they sell it as well. Today's earnings downgrade was just an excuse to sell, come on, target price was lowed to 490, which is 1.5 times higher than current one.

Let's see what tomorrow brings.

Full disclosure: at the time of publication author had a long position in GOOG. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Deflation Is Horrible

Great article in Minyanville last Friday. Agree with author on almost everything. Yes, world economy is in big trouble. Yes, people and businesses are taking on less debt and this is going all the way to the top, i.e. Fed. As a result, inflation in current situation is close to impossible, despite all attempts by Fed and Treasury. The only thing I disagree with is the premise that deflation is good.

OK, everybody might agree that prices going down make you feel better. And in some sectors of economy it's decades long reality (computers, for example). Unfortunately, what's good for a person is bad for economy, and as a result, for everybody. In deflationary environment, everybody tries to delay purchases. Why hurry, this thing will cost less later! Economy slows down, companies cut expenses the usual way: laying off employees. Less paid employees means less demand for goods, creating positive feedback, or as it's known since Great Depression, deflationary spiral. Eventually economy might find equilibrium in deflationary environment, but this equilibrium will not be happy one, with unemployment much higher than in inflationary environment. Empirical rule known to economists as a Phillips Curve, defines inverse relationship between inflation and unemployment. There is only one example of deflationary economy after World War II: Japan. In 1990s it experienced deflation. Surprise, it was also a period of almost constant recession. This paper suggests that Phillips Curve flattens in the negative inflation (deflation) zone. The problem with it, Japan is a quite unique example. Businesses there are not eager to lay off employees at a drop of a hat. It just might be that Japanese corporations kept extra workforce on their payroll because they used to do that (remember lifetime employment?). In US example (Great Depression), picture was very different. Unemployment jumped to 25% and stayed there for a long time.

Some people can argue that world lived mostly in deflation since invention of money. True. But world also lived in economy which wasn't growing much and most people had subsistence living standard. They couldn't cut expenses even if they wanted to. Great Depression showed us for the first time what can happen when deflation hits economy in which significant part of spending is discretionary. Our current economy has much higher discretionary part than in 1930s.

My take on it: be afraid of deflation, be very afraid. I applaud Fed and Treasury efforts to stop deflation. And I'm afraid that they are too late.

Sinking Feeling

Not only because of today's market. Mostly because people making decisions can't get their act together. Sure, generals are always ready for the last war. For current financial leaders last war was inflation and deflation was distant memory. Some of them even said that it's easy to fix deflation, just run the printing press. Year, right, and Japanese experience didn't tell them anything. As if Japan was some obscure country, not the second biggest economy in the world.

Interest rate cut by European Central Bank is telling, I didn't expect 0.5% from Trichet. But cut by Bank of England is more like full blown panic. It tells me that, despite falling LIBOR rates, there are some other problems ahead. Maybe banks are lending money to each other, but credit is still not cheap for people and businesses. Banks are cutting credit card limits. And it looks like people are not eager to spend money, awful! They cried that people need to save more, spend less, but when it really happens and they see consequences, truth hits them: it's a road to total disaster. Our economy (and I mean world economy here) is mostly based on production of discretionary goods. Which means that people really can cut expenses when they want and bring economy to its knees. Last time such thing happened, in 1930s, depression was cured by World War II. Now discretionary part is much bigger in economy, people can cut their expenses much deeper. What can pull us out of it now? Nuclear war? Thanks, no thanks.

Bought more Altria (MO) today. Looks like we are going to retest October lows, so I'm ready to buy more.

Too many talks about bottom. Too many people are bullish, even some permabears. Sorry, bottoms don't happen like this. We need total capitulation, when almost everybody is bearish.

Full disclosure: at the time of publication author had a long position in MO. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Trying To Make Sense

My yesterday's post was wrong. Instead of crying, I should keep trying.

Current picture, collected from bits and pieces of information: funds got mad. By the way market reacts, significant percentage of them. That includes hedge funds, mutual funds, university funds, state pension funds, i.e. all kind of them. Looks like many funds use methods developed by hedge funds in order to increase performance, "beat the market". The biggest problem with this approach, as Jim Cramer noted in his great book "Confessions of a street addict", is that you can't beat the market if you are the market. And many funds behave the same way, buy and sell things (stocks, bonds, commodity contracts etc.) at the same time. We can see the results of this behavior in the commodities run in the end of the last year and beginning of this one, huge downfall of stocks in September-October and last week rally.

Of course, not all funds are doing the same thing. But you only need about 10% of participants to behave the same to screw up market. So, when hedge funds started liquidating after Lehman Brothers collapse, stocks went down huge. When pension funds felt that oil is going down and there is no force in the world to keep it above $120, they sold everything.

Of course, there is a huge problem here for the funds themselves. If fund calls itself "hedge fund", it can't have huge one-sided positions. It needs to hedge positions, buy options to defend long or short positions, sell 6 months ahead future contract if they buy 4 month one etc. But you need to do a lot of work and performance would suffer. So they try to find current trends and play them. The problem is, when funds are the market, or at least the active part of the market, they magnify any trend they are in and create bubbles.

How can we profit from it? Tough, but not impossible. We need to identify bubbles and short them when they are bursting and identify severely oversold stocks which don't deserve it. I did it with oil in the end of July and beginning of August (sold DTO too fast, granted, but made profit anyway). Another approach is to detect trends which are not obvious for other market participants yet, like I did with dollar. I'm still holding UUP, but now looks like time to sell. We'll see. I don't allocate big part of my portfolio for such trades, until last year I was pure long term investor, but this market is not for investors. I think of allocating more of capital for trades from investment.

Full disclosure: at the time of publication author had a long position in UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

This Market Makes No Sense

First of all, my congratulations to Barack Obama! It's really historic victory in really historic election.

Now, back to the market. It's crazy. Jim Cramer said today that stocks trade like both candidates won. Market is severely overbought, almost everything is up. It might be time to sell something into strength, will think about it tomorrow. Of course I'm glad that market is up, it makes my portfolio go up as well. It's just annoying that I don't see any reason for it and I'm not alone.

There is some silver lining in the financial markets: LIBOR rate is about 2.7% today. That means that world credit freeze is thawing somehow. Maybe we can avoid deflation. Life is looking a little bit brighter.

Good Riddance, October

The most awful month in my investment life. I wish never to see another one like this.