2008 Previous Columns

December 31, 2008                 The Last Trading Day of the Year

5:30AM New York time. Well… here we are. The last trading day of 2008… a year that will go down economically as one of the most tumultuous since the 29 crash and Great Depression. It was not a good year for the vast majority, but I'm sure it was a very good year for some. As a long term investor clinging to the mantra of "stay the course"… you are probably not so happy right now. If you were more of a trader type, or were among the many that I knew who saw the land mines of real estate speculation and easy credit becoming more numerous, you may have gotten out early or even capitalized on what has happened. Half of my year was spent with money in limbo after the Bear Stearns debacle. Even after a new home was found, the markets were operating within volatility and behavioral patterns I was unwilling to take much risk in. So my results are for the most part based on Q1 2008 market activity. I closed the year down about 6%. I'm not happy with that, but as losses go, its not so bad given what many others have experienced. I am at least well within catch up distance from my high water mark. Quite a few funds out there are not in a position to say that.

On the upside of all this, 2008 will go down as a year that started to correct a number of excesses… perhaps some of them for a very long time. Fortunately or unfortunately… depending on your perspective… Wall Street has been changed for the balance of my lifetime. Personally… I would like to get back to a more basic, conservative approach to banking and investing. Not everybody should be running a hedge fund. The last decade has also seen a proliferation of products getting sold with questionable liquidity in bad times and of marginal return value even in the best times. How long were we going to be allowed to sell smoke to the World's financial institutions? That was an accident waiting to happen. Export driven surplus economies have been financing US consumption and borrowing for over a decade. That was never a sustainable situation either. And we have perhaps also learned that leverage is a sword that can cut both ways and should be used with the utmost caution.

Basically… 2008 was a year that a lot of sh** hit the fan all at once. We still have much to work through. Although capital markets may be searching for and close to a bottom, the real economy is not there yet. 2009 is going to shake out anybody who is not prepared to weather an economic siege that will probably last another 6 months. Still… I tend to be an optimist. I think 2009 is going to present some very good trading/investment opportunities. A lot of investment, real estate, and capital stock is going to move from weak hands to strong hands. The US is going to be left with a mountain of debt to work through. It is not the first time. The rest of the world… well… they are going to have to expand domestic markets as US consumption shrinks. That is not a bad thing. Whatever moves us toward a more homogeneous world is OK with me. And I could care less if the Dollar loses its reserve currency status. Good riddance. A currency is only as good as your countries net ability to produce goods and services of value, that along with your fiscal condition. Both of those need vast improvement but will… I think… slowly come around.

Enjoy the rest of the holiday season and best of luck to everybody in 2009.

December 29, 2008                 A Rare Book Critique

6:30AM New York time. I'm reading an interesting book I just got for Christmas. It's called "A Demon Of Our Own Design" by Richard Bookstaber. I have about 20 pages to go and I have to admit… I peeked at the end a little bit. I wasn't sure about it when I started. Mr. Bookstaber is a PhD economist from MIT. His background is in risk control and systems. If I'm at one end of the financial market spectrum, he's at the other. He's got all the right pedigree and is not shy about letting you know where and whom he has worked for. His buy side stints included Moore and the Ziff brothers. I tend to shrink away from books I feel are more concerned with shameless self-promotion and ego massage than some larger message or even a good story. But as I got deeper into it, I began to see that the name dropping, mountains of academic credentials and associated accolades were essentially making a point that… no matter what we think we know (or who we know)… that modeling market prices or behavior… is doomed to fail. That liquidity drives price often for reasons other that what might be considered "rational". And that periodic financial crisis are inevitable… even more so in recent decades as we have introduced even greater complexity into our financial system. Further… that the academic world has largely constructed the way we use mathematics to study economics, in spite of the fact that some of the key tenets simply don't function according to the model assumptions in the real world. The whole concept of rational markets becomes an oxymoron. Markets are complex systems that are impossible to model and the dynamic behavior of participants system repeatedly tends to drive events in unanticipated directions.

By the end, which is where I nearly am now, I feel like almost like a kindred spirit… with someone whom a decade ago I wouldn't have the slightest view in common with (and who wouldn't have given me the time of day). So it's almost like reading about this guy's journey. From the ivory tower of omnipotent understanding all the way to the humble comfort of realizing that the system itself is so vast, as to be beyond our ability to predict OR (at this point in our evolution anyway) understand.

I guess all it does in the end is make me feel a little better about my own world construct. It solidifies my view that we have taken a generally workable system, but permitted it and ourselves, over the past few decades, to get away from its core purposes of simply allocating capital wisely. It is a system that has broken from the idea that producing something of value will in turn, create wealth, to one where the creation of wealth has become an end to itself. In the final analysis it's all about learning from experience anyway… trial and error. Learning that frequently, we are our own worst enemy. Learning that we are NOT in control. Learning that we often don't behave in linear, rational ways. Learning that the system IS much bigger that we are. And that all of these things are… in fact… OK. In the end, it's more important to ride the wave well rather that trying to control it… or worse… predict exactly where it will go.

I remain short a small Dollar Index position which I do want to add to but perhaps not until we get into the new year. I think 2009 is going to be one of those years where whatever direction things come out of the gate; you want to get with them. Participants will be very risk averse but that is going to be counter-balanced by the NEED to get back into the markets. So while nobody is going to want to be a hero, there will be growing willingness to get on board a trade. I think those trades will be short the US Dollar, long stocks, short bonds and long gold (maybe some other commodities too). I'm not saying all of this is going to happen right away. But I can easily see an environment where these trades feel off of and support one another.

December 21, 2008                 Even The Weather

5:30AM New York time. Yesterday was the first Sunday football I have ever watched where both east and west coat games were hampered by blizzard conditions. We visited my sister in law on Saturday in central Mass. just north of Worchester. It looked like a hurricane had run through the place. The ice storm that left so many without power for so many days snapped off an amazing volume of branches and topped hundreds of thousands of trees. My brother in law jokingly asked, "if God was mad at us?" I responded with my typical farmer on the water answer… "Well… when your pants are down." And that's the way it is. When things go wrong they can sometimes go really wrong for quite a streak. That's why we in oyster-land try to make sure you don't even let the going wrong thing even get a foot in the door. And folks… this is shaping up to be a VERY harsh winter for us here in the States.

So as I look at the S&P chart this morning, and given the fact that there has been no letup in the "things going wrong " category, I'm going to steel my mindset and prepare myself to be looking at a chart that rolls right back down over the next week or so. I don't want to see it, and for a while I was hopeful the market was turning a sentiment corner. But the oyster-farmer pessimist in me can't help but see the irony of a run back to the lows in the days before Christmas, just when people are trying to squeak out a little quiet time with family and friends and forget their financial troubles.

As far as trading goes… I think the disconnect between equities and the dollar is increasing in possibility. And I did something I rarely do last week. I left my small Dollar Index position on through that big dollar bounce. I would rather give some money back than trade myself out of something that I think is ultimately going to work and will be very difficult to time because of the volatility. So I am staying away from stocks right now but looking to add to that.

So enjoy your holiday… whatever that holiday is. I think I'll be putting up a post for Christmas Eve day but who knows. And by the way… keep your pants up.

December 19, 2008                 My Own Seasonal Low

5:30AM New York time. Today is yet another one of those days I don't have much to say. Some days I don't feel like writing. Today… I have the time and the inclination… but I don't really have a topic. Part of the problem is the knife-edge the markets sitting on. And I still think equities hold the key, with the US markets being the leading edge of that. This last week has seen a stall to the upside. True, the market has managed to hold in through another slew of negative news for the week, but will that be enough? As I look at the technical picture this morning, one huge question comes to mind. Will this recent sideways consolidation resolve to the downside again as all others before have? I stopped myself out of my small long S&P position yesterday. The trade overall was a wash. I had the right idea but traded it poorly. Seeing that, and understanding what I did wrong, I have not changed my bias. I still have an inclination to buy weakness but I also don't think it's prudent to try and be a hero in this market. I would much rather re-establish a fresh position in a day or two when I see something behaviorally that makes me more comfortable. The last two days saw the first "stickable" negativity in a week or so of trading. Stickability being the tendency of the market to both hold intraday weakness and close weak. Not that the weakness the last two days was really bad… especially given what we were seeing not too long ago. But it was there nonetheless. So I'm on the sidelines and watching how the price action resolves. The dollar is bouncing too, taking gold a bit lower. I have kept my Dollar Index short and am looking to add to that. I still have decent money in that trade, and while I don't want to give it back, I also need to have a higher degree of loyalty to that trade given how well it has performed. I see a weaker dollar is a pre-requisite to a recovery in US equities and the economy as a whole. Its part of a whole trade package.

I was watching network prime-times news the other night, and they did a dumbed-down piece on deflation and why it was bad. Lower prices for goods lead to less company profits, which leads to fewer jobs. The prime statistic, which fueled their report was the days CPI number. In a classic example of using a statistic to make what is arguably an inaccurate point, they neglected to point out that ALL of the weakness in headline CPI and PPI over the last few months was fuel. Prices for a variety of other goods including many staple items in the food group have actually NOT declined. According to BLS, food prices are not going up as much as they were over the summer, but they are still going up. Many remain elevated from our prior commodity bull market. Core CPI and PPI are showing the same trend. They are not rising as much, but they are still rising. I only use this as an example of how much our behavior (mood) can be determined (and manipulated) by perceptions, or in this case, misperceptions. And what makes that important is remembering how that can swing between extremes. Negative perception is just as potentially transitory as positive perception.

My own anecdotal evidence from the world of seafood is showing accelerating weakness. My Canadian customer, who typically has a very busy holiday season, is actually closing this year for the Christmas holiday week. They have both a restaurant and a large wholesale business in Toronto. Typically, my best sales to them for the year take place around this time of year. So the closure represents a huge reversal from the normal seasonal tendency. Their level of business from New Years out through Jan-Feb will be an important indicator for me of underlying condition. I am not optimistic and am simply hoping for some minimal level of order flow through the winter. The one economic prediction I will make is that Q1 2009 will be the longest three economic months my generation has (or will) ever see(n).

Lastly today… as I do every year at this time… I make note of my own non-economic seasonal low point. In two days, we will see the shortest day of the year for the Northern hemisphere. Happy Winter Solstice everybody. And the second week of January will see the statistically coldest week of the year. The time in between is my seasonal nadir. It will be as close to a period of hibernation, both personally and from an oyster business standpoint as I get. Yet it also is a reminder to me to start looking up and out. My life as oyster farmer has become dominated by the seasons… as it is for every farmer. Our goal is to survive the low points and make hay on the high points. The 2008-2009 season will highlight that like no other to date. But one thing the farmer knows for sure. He/She WILL come out the other side. And unless we want to predict that for some reason, the Earth will not begin her tilt back towards the Sun this year, then farmers like myself will have a similar anticipation of the return of warmth, and light, and the greening of our world.

December 17, 2008                     Fear Factor

5:30AM New York time. Yes… two posts in a row using the word fear. Anybody care to include me in his or her word frequency sentiment analysis sample? Ever since I've started getting a little friendlier to the equity markets, Gilmore and I have had this ongoing disagreement. My point has been that the equity markets are the leading edge barometers for the future prospects of an economy. So what has been interesting for me to see in US equities is a reluctance to continue going down and some evidence that they may even be trying to put in a bottom. Again… for me… that puts a light at the end of the economic tunnel. I understand and have stated frequently that the real economy has more to go on the downside. Things are going to get worse before they get better. But if we can at least put some kind of time horizon on it, based on what the equities may start to predict for the future, then we can at least catch our collective breaths and steel ourselves to hold on for another quarter or two.

Gilmore's point is that I am looking at stock market sentiment only, which he agrees is overdone, but that I am ignoring a larger, highly negative fundamental picture, of which we have only seen the tip of the iceberg. So I ask him each time… then do we go on to make new lows in stocks once this bounce is over? I never seem to get an answer to that one. I agree that I am simply playing a sentiment extreme in the stock market. I have never said it was anything otherwise. But I would also pose this question… how much of what is going on in the real economy is sentiment too? I know smart people who took gobs of money out of the bank and stashed it in the basement just in case. I know people with tons of cash in the bank who are telling their wives to "not spend any money right now" even though they would be considered wealthy by any measure. I know people in the prime of their careers who are worried they won't have any 401k money left when they are eligible to start taking it out 20 years from now. Are you telling me these examples don't have something to do with sentiment too? Obviously if you've lost your job and are behind on your mortgage, your fears are tangible and real. But for every one of those, are two or three people who are BEHAVING like they're about to lose their jobs and not make THEIR payments… even when they're not. I am NOT saying that these people should go back to excessive spending to buoy the economy. All I'm saying is that fear is a powerful emotion, and (along with greed) it not only drives the stock market but it drives the economy too. Fear is highly contagious… it spreads through a population. And one of our big problems has been that people (and many institutions) are frozen with fear. So anything that starts to thaw the fear, to reverse the cycle of it, will (in my view) be a good thing toward starting to "normalize" our situation.

And for the record… I do acknowledge that I am not being completely objective in my "analysis" either. True, I'm a contrarian and am always going to be sensitive to a situation where a trend has been in force for some time and starts to break down. But I have an emotional bias on this one too. I run a real business, selling a real product, and when things get tough, as they are, it becomes more work to sell the same volume of product… regardless of the quality. But I think I might be a little more used to the state of fear than some of you. It's the fear of the farmer. I think my wife has finally gotten used to it and now simply writes it off. "You're either worried about having too many oysters… or not having enough…" . I also worry about the weather (nothing like listening to a howling wind in the dead of night in the middle of winter on an extreme low tide knowing your little oysters are just sitting there naked on their bed)… I also worry about equipment… predators… and regulatory agencies. For all the fears… I'm still here… doing what I do… even planning an expansion in production for next nursery season. The lesson I will pass on to you… you go through lean times… you go through fat times… but you always go through. The irony is that fat times can make you complacent… while lean times can make you tough. You learn more from your mistakes than you do from your successes. That which does not kill us makes us stronger. When life looks like easy street there is danger at your door. If you're getting the idea that the Buddhists had it right all along and that life is… well… always working between some two extremes and that it includes… some bad… then you're almost there. Perhaps the abnormal state is actually unchanged. Fear is a state of mind. And it is just as illusory as the state of euphoria. We would all benefit if more of us could at least begin to recognize the two extremes within ourselves… and perhaps see them for what they are.

December 15, 2008                 Fear Continues To Subside

5:30AM New York time. Last night was the first night I rode without GTC stops on my positions. To me, it is another indication that the "panic state" we have been seeing in the capital markets continues to fade. And as the markets return to a more "normal" emotional state, more money will drift back too, as participants begin driving a new macro trade. If its happening with me then its happening with a lot of people. Who knows… it may also be an indication that the credit markets can thaw a bit more too. Fear is a powerful collective human emotion. Fight or flight baby! Wired into us since the time of the cave and its resident cave lions. If fear subsides in one corner of an associated system might it not be natural for it to start subsiding in closely tied sectors as well?

60 minutes has been running gloom and doom pieces on the economy for a month now. There was another one last night. The local news is saturated with bad news. The public is fully on board now just as the capital markets begin to show some resiliency. Is that not the way the progression is supposed to go? Again… I am not trying to downplay the magnitude of what has happened or what remains to happen. Things have changed forever. All I'm saying is that I believe the capital markets have priced in much of the financial collapse scenario already, so as a contrarian, and for other contrarians out there, I see signs that this is an excellent opportunity to start playing these markets from the other side. As a human being, I fully understand that there will be much pain yet to get through in the economy, among my friends, perhaps among my family, perhaps for myself. But as an optimist in regard to the human spirit, I think the changes that will eventually come forth in American society as a result of this crisis will be ultimately beneficial, and will lead (at least for the rest of my generation and perhaps part of Sydney's) to a more sustainable, conservative mindset.

Position-wise, I'm now back up to my (albeit still small) trading size in the S&P 500 and a small Dollar Index short. I realize I'm a bit late out of the gate with that dollar trade, but I'm trying to diversify my evolving macro view a little bit. It does not bother me that the S&Ps look to open down. Down openings with up closes are the most sustainable, bullish behavior there is. And we have seen more and more of it. Gold is up and the Dollar remains weaker too… another sign to me that things remain in place.

December 12, 2008                 Was That A Whiff of Decoupling?

5:30AM New York time. The last few days had me wondering if the title of this piece was starting to come to pass. But as prospects for the Detroit bailout failed, and stocks fell, so did support for gold and money flowed back into the dollar. The way I see it, the dollar and gold had been playing catch up over the past few days to a stock market that had run ahead of them over the prior couple of weeks. Gold at least, gave up a big chunk of gains yesterday afternoon late once the stock market got whacked. And the chart looks remarkably similar to the price pattern carved out after it made its high. Subsequent action over the following weeks took it to new lows. What the last few days does highlight is; IF your macro view concurs with mine… that equities ARE trying to make a bottom and the coupling remains in place, then it makes sense to have a little of everything on rather than all in one market. Its like changing lanes on the highway during a traffic jam. It seems I always hop into the one lane that is moving too late, only to watch the lane I just left clear up (relatively) and move ahead. If you DON'T agree with my macro view, and think the dollar/gold trade is separate from the equity trade, and the decoupling IS now unraveling… or WILL do so soon… then I guess you are simply in the position of having trades on and waiting for them to start behaving the way you envision. My account is far more trading oriented. As a non-leveraged cash investor, then you might need time to accumulate and can certainly sit on positions waiting for your view to come to fruition. But if you're like me, you know you can put trades on in size with one click of the mouse or one phone call. Why anticipate something that has not consistently shown evidence of being in force?

On a slightly fundamental note… I make the case that a weaker dollar is a prerequisite for America regaining her competitive footing. I think the majority of economists would agree. That view goes hand in hand with an equity market that could likely anticipate some kind of demand bounce back for American products and services. Where I differ from economists is that I am neither here nor there on inflation or deflation, and wonder why prices can't just kind of meander around. It seems economists are split along the lines of one camp or the other. How about somewhere in the middle? Some might argue that in inflation at least, there is demand for goods and nominal wages are rising. I would counter that it is demand for goods… excessive demand for goods… that helped get America into this current predicament in the first place. So to expect that people will be better off under a more inflationary environment than a deflationary one does not make sense to me. Sharply lower spending levels as an initial reaction to a massive credit contraction and a rapidly weakening job market should not come as a surprise given where we were. Recent statistics have actually shown Americans paying down debit for the first time in many years along with a spike in the savings rate. At another point in time those would have been considered good things. The fact that they result from an environment of general economic panic is where the problem lies. We need to get there… just not all at once. In the long run, America needs to make more real stuff and provide more real services that are competitive on an international price basis (cheaper for surplus nations to buy). I'm an exporter and I would love a weaker dollar. Plus… we need to make foreign products more expensive so as to deter our over-consumptive habits. My intermediate view is that getting past this winter without things deteriorating to new lows will be very important. Relative stability, even at a comparatively low level, with the return of longer days and warmer weather, will go a long way toward the helping the process of acclimation and healing.

As far as the auto industry bailout goes. This may again be Congress trying to play hardball and wring some concessions out of Detroit and the UAW, much like they did in the early days of the Wall Street bailout. I tend to agree with most economists that a pre-arranged bankruptcy and restructuring, with 3rd party warranty protection probably makes the most sense long term, but the risk of being wrong and a Lehman-like fallout of outright bankruptcy is probably a larger worry. And I do think it makes sense to try and tackle one problem at a time between housing, Wall Street, and the Automakers. My strategy remains intact and my guess is that as hope for some kind of rescue (however you feel about it) is resurrected, you will see stocks put in another higher low and turn around.

December 10, 2008                 Every Day An Adventure

5:30AM New York time. Not much new to say this morning. As I typically do every day, I ask myself if, based on the price action, my current theories are holding up or not. I guess that makes me a fan of fractal theory. The little wheels look and act like bigger wheels, which in turn look and act like even bigger wheels. So each day is a separate event, with its own behavior. Five of those days make up the trading week. And a bunch of weeks make up a larger, longer-term picture of behavior. You simply need to make sure that your strategy is in tune with the balance of behavior for whatever time frame you are involved with. In other words… your cumulative running P&L says it all. A month ago, a weak close after a couple of days of rally would have had things very weak this morning. That is not the case. Asia did not follow through on yesterday's poor behavior in US equities. US and European stocks are holding between gains and losses. The dollar is a bit weaker and gold is a touch higher. Those are the ingredients that I want to see to confirm my view. You can complicate the situation and conditions as much as you want with all manner of analysis… but it will still always boil down to long or short… up or down.

I sold half my S&P long position on Monday. I am looking to put it back on plus a little at some point on a pullback. We are still in for quite a bit of two-way flow, and one day of weakness is not enough to get be to put my whole position back on again. I don't want to get caught up in splitting hairs at this point. The key issue for me is; I think it is now safe to hold a small long core position in stocks. I will not chase the market higher but I do want to be prepared to add on what I think will be periodic and fairly frequent bouts of sharp selling. I think it is indicative of overall market condition that for the first time in many months, I feel comfortable with this strategy. It is somewhat worrisome that I am hearing more and more of this thinking coming over the financial airwaves. But I also want to keep things in perspective. I don't want to over-think what a handful of professionals are saying weighed against the magnitude of global selling we have come through, along with what that has done to global sentiment.

Feeling slightly better about my ability to step back into the trading arena with a view… I turn my focus on the real economy. First and foremost, I have to sell a product into that consumer market. And while it is a food product, it is not a staple. It probably qualifies as a luxury good. So, if we have put a bottom in for the equity markets, measuring the degree to which the public will start to feel better (perhaps acclimated is a more appropriate term) to current conditions and they're perceived future prospects will be important. Everything I hear from seafood suppliers I deal with is dismal. I'm not sure how much it will help for people to see their 401ks stop going down (and maybe even bounce a bit), but it will be an interesting test of resiliency. My hopes are not high over the next few months. I think we are looking at a winter of real bad economic news. That's going to mean people hole up and hibernate after the Holidays through February. But March/April will be a key indicator time. Warmer weather, if it coincides with a small rebound in consumer sentiment could confirm a larger macro economic bottom. I have no doubt I will ever see the degree of devil-may-care consumption we saw three years ago in what remains of my lifetime. That's a good thing. But I would welcome the start of a long, slow, more conservative climb back out of the pit.

December 8, 2008                 No Beating Around The Bush On This One

6:00AM New York time. OK…I'm not going to beat around the bush on this one. And if gold bugs and dollar bears and US policy detractors take issue… well… I'm sorry. But all these markets remain tied at the hip. You can say the US needs to learn the painful lesson about spending and borrowing collectively within her means. You can say the dollar should not be the world's reserve currency anymore. You can throw all the stones you can lay your hands on at the string of bailouts and rescues to the bastions of American "capitalism" and industry. All of what you rail against is true… and none of it speaks highly of the financial system we have evolved ourselves into, nor to the imprudent risks that have been taken. But the harsh reality is, that presently at least, when capital is flowing in the direction to make all that happen, it is a positive for stocks… not just here, but globally. So gold is up this morning, and the dollar is down. Oil is up too. But they are ancillary markets. A reversal on Friday in US stocks and follow through this morning overseas are driving all these other price moves. So now that I am starting to get active again on the trading front, I have taken the strategy of cutting to the chase. I'm going to be trading the stock market as my primary trading vehicle.

I said on Friday morning that the reaction to Payrolls would be a key indicator for the stock market and its underlying sentiment. I think the verdict by days end was obvious. I bought stocks at around 10AM… got stopped out with a small loss on new lows shortly thereafter… then bought them AGAIN about a half hour later when there was no follow through to the intraday lower low. That turned out to be the bottom for the day.

I had a conversation with Gilmore on Friday too, which I will relay, because it sums up what I think is going on right now. I see an increasing two-way flow returning to the equity markets. That is a critical observation. In my view, much of the decline we have seen over October and November was forced liquidation. I am not going to argue the justification of that selling from a fundamental standpoint. Only history yet to be written will judge whether or not the levels we reached at the lows were justified or not. I emphasize only the words; FORCED LIQUIDATION. That is not a condition I believe I have ever seen in my lifetime… certainly not to the degree with which it took place. But I will say this: Forced liquidation, by definition, is as bad as it gets. You can say there will be more to come, that may be true, but I challenge ANYONE to say that when the condition exists, it does not represent the height of desperation. I cannot be who I am… or what I have been taught… or what I have seen and experienced with my own eyes and senses… and not think that in a condition of "desperation"… that there is not also opportunity. I say nothing more than that. I'm sure if we were face to face I would be bombarded by a chorus of continued bearish rationale… of negative statistics… of news that would chill the average person into wholesale flight. In fact… that is exactly what I got when I cleared this view from my chest to Gilmore on Friday. To be honest… none of that would bother me. And if in fact, the markets are returning to a more two-way flow, and the forced liquidation is subsiding, then such a reaction should once again… as it has done in the past… encourage me in my view.

I will provide one last thought from my own "Handbook On Market Methodology and Life": When we go through a period of sustained below normal temperatures, and the more "average" deviations from mean have been run through in sustaining the below normal period, is it wise to suddenly turn our view to one that bets on continued new history… and a run to even greater extremes? I have the highest praise for those who predicted that this current capital market collapse and subsequent economic contraction would be historic… a once in a generation event. I am sure you are as well positioned as anyone on the planet to weather it. You have been right on the money. Gladiators… I salute you! Further… I OWN the fact that I have more than once bet against this view, using normal historical ranges and "extremes" as points of "turn" in all of this. To date, all these attempts have failed. The current attempt is still open and I fully realize that I may yet again be forced out. I simply put forward this thought from my own playbook: Does what has happened, and what we have seen, change the nature of the system? My answer is no. We are part of a larger system. And the system is cyclic. From the cosmos to the atom… the system is cyclic. And if I truly believe in this system… and that it is driven by forces to vast for us to even comprehend at this point in our evolution… then I MUST continue to make the bet… again… and again… and again. And if I continue to fail and be proven wrong, then I say to you, that it is not the system… but my own feeble ability to see above the trees, which is to blame.

December 5, 2008                     From Worrying To Doing

6:30AM New York time. I don't have a lot of time this morning. I also don't really feel like babbling. But I think today is a very important day for the stock market. It's a Payroll day in the midst of a historic economic downturn. In fact… the next 3 Payroll numbers may be, in my opinion, the worst we will see for a long time. It is a colossal test of whether or not the stock market has in fact, priced in the current level of bad news and the worst case scenario for bad news yet to come. I myself have noticed a clear change in the price behavior of the stock indices to bad news of late. The huge down day of Friday November 21st and subsequent recovery of Monday the 24th was potentially a culminating pair of days. We had the Citi rescue announcement, the Volker announcement, and the FASB market-to-market rule announcement… all around that weekend. That set of days has the POTENTIAL to be one of those exhaustion moves. Today may be one of those days that test that theory. As I have said numerous times in the past regarding Payroll numbers… they are far more valuable as barometers of market sentiment and positioning that they are as drivers of future price action. If the number is below expectations and the market falls and continues lower for the day, my theory goes the way of so much other smoke I have blown at you in years of writing this column. If the market can hold and turn… possibly even recovering and closing higher by the end of the day, then I think I may be on to something. Importantly… I am not saying this as a panicky investor hoping it comes to pass… or innocent third party trying to sell goods into a rapidly declining consumer environment and praying the capital markets start signaling a bottom. That is another issue. I make the point as a trader… looking for the next good high odds trade… PERIOD.

To be perfectly honest… my gut turned that Friday the 21st. Prior to that, I was experiencing incredible angst. A stomach turning, no appetite, can't sleep kind of anxiety. Then… for some reason, by the afternoon of that day… despite the miserable close… it was gone. It has not returned. I think prior to that I was constantly worrying about far deeper ramifications… like local banks closing and goods at the grocery store not being on the shelves… people hoarding cash and paychecks bouncing. Hey… maybe all that can still happen. All I'm saying is that I no longer have that nagging fear. The feeling in my gut changed and I am listening to it. Its not scientific, or based on anything concrete. But tell me what about the last 6 months in economics has been scientific… or based on anything concrete.

From an emotional/behavioral standpoint… I'm just like all other participants. In fact… whether you want to believe it or not… I'm just like all of you (or… you're just like me). We may act contrary to our fears… but we all experience the fear. So in explanation of WHY my own angst may have subsided, I'll relay my own personal experience and explanation. I think, simply put, as we humans go about trying to DEAL with problem situations, our attitude about the situation changes. We go from worrying about them to doing something about them. And I think the difference there is critical… much more than semantics. Here's my personal example. Industry wide… oyster sales are WAY off. Mine have held up, and to tell you the truth… I have no idea why. But my fellow Co-Op member (we'll call him Jim), has seen his sales vaporize. Believing it is only a matter of time before the same thing happens to me. I have embarked on a multi-faceted marketing campaign. We have started a "Direct From the Grower" sales push, to bypass the traditional shellfish dealer stranglehold and markup to second-tier wholesalers. We continue to prospect a whole new batch of potential accounts. You can now buy our oysters on line. And this weekend, I will be poking around the Food Network web site for production contacts to try and get our "Mystic" oysters featured on Food Network programming. Obviously I will be offering choice product on a complimentary basis for mention on air. Part of the problem with oysters is that people don't eat enough of them at home. Opening them is a bit intimidating. So they are relegated to the restaurant trade, which obviously, is in its own serious downturn. So there you go, I personally have gone from worrying about things to taking action. It's part and parcel to our resilient nature… the ying and the yang. Yes… we humans are frequently stupid… and emotional. But we recover fast… and we are capable of working hard. And believe it or not… we ARE capable of learning from our mistakes. Balance in nature… balance in life… balance in us.

December 3, 2008             Bubble Theory

5:30AM New York time. We were talking in the office yesterday about bubbles, and how in our meager professional lifetimes, each of us being around the 50-year mark in age, have seen more than our share of bubbles. Thinking on it a bit further, we made the observation that the majority of those bubbles (we included the word crisis in there as well), have come within the last twenty-five years. Going backward we had the dot com bubble 8 years ago around the turn of the millennium in 2000, we had the LTCM problem in 1989, that came along with the Russian financial crisis, prior to that we had several years of severe S&L problems with its own albeit smaller real-estate related bear market that also climaxed in 1989, before that we had the oil price bubble and collapse in 85. So lets see, all told that's four crisis, plus the one we are in now, all within a span of 23 years. So on average… we've been dealing with a crisis in one form or another every 4.6 years. And each one of these crises had its associated boom as well. So in reality… we've been going through either some kind of boom or bust, at every point in the last 25 years. Not long in front of all this, we had the roaring inflation of the seventies, complete with lines at the gas pump and the Iranian hostage crisis. And going back a bit farther, we had the tumultuous sixties, with all of its associated societal issues of civil rights and social unrest.

I would argue the point further that we are in process yet again, of building still another bubble as a direct result of dealing with the one we are in now. US Treasury 10-year yields hit the lowest level in history in the last few days. In a period when the US Treasury is facing the prospect of having to raise more money that it ever has to rescue the US economy, they are also currently being allowed to pay (so far) the lowest interest rates ever for that capital.

Ok… ok… I'm sure by now you're thinking this is just another one of Plant's drastic over-simplifications… and you're right. But I would hazard a guess that there is an underlying validity to this over-simplified observation. The entire last 50-years has been a process of acclimation by (using the US as the example) society having to deal with a fast-changing set of underlying conditions. The societal upheaval of the sixties and seventies was driven by rapid changes in individual rights and basic "reorganization" of US society as a whole. The status quo that had existed for a long time was threatened and ultimately changed. The last two decades of crises has been driven by rapid changes in global finance, and the increasing introduction of technology, which allowed an ever-increasing pool of capital to move around the world. The increasing frequency (and lately… magnitude) of the boom bust cycle is a result of that changing underlying condition. And more recently, here again, the existing status quo of how things were done and who controlled it has been threatened and is in the process of being changed even as I write this.

Simply put… there are more people than ever in the world, there are more people than ever in the world with savings to invest and there are more people in the world than ever before with the ability to better their standard of living. Rapid change… in any area… finance or civil condition… leads to an increasing tendency toward boom bust cycles.

The question I ask next is; at what point do we enter a period of relative global stability… in terms of both society AND economics, where we can simply deal with more of a steady-state condition, where the majority of major change has taken place and we become simply "tinkerers" within the system rather than major up-heavers of the system itself. Obviously… if we are creating yet another bubble as a result of the current bubble's crisis management, then we are certainly NOT done. Is there any longer-term cycle that we can look for guidance as to how long these "periods of volatility" last. And I'm not talking about market volatility. I'm talking about developmental volatility within out human evolution on this planet. I don't have an answer to that one. Perhaps our market/societal historians have a better handle on that. Do periods of upheaval eventually lead us to periods of relative stability… either through shear exhaustion… or as a result of a drastic reordering of the system, which brings all of its billions of participants back to a relatively base line level in aggregate? It's kind of like a company that goes through great turmoil as it associates new technology but then slowly stabilizes as the new technology becomes increasingly integrated.

All of this is one giant rhetorical question. But what it does highlight is that we should not look anytime soon for stability to return. It is uncertain if we have even seen the peak in the rate of change. Perhaps the stock markets of the world will slowly put in a bottom. But that is just one factor in a larger condition where the process and rationale for "bubble making" is still alive and well. All we can do is try to structure our lives to be out of harms way as best as we can. For those that have already been steamrolled by change, you need to reinvent yourselves in a way as to either capitalize on continued change, or even take advantage of it. I do not know if I will live long enough to see us enter one of those cycles of "relative stability". I don't even know if that would be a good thing. Perhaps it would be hideously boring after what we are now getting used to… though I for one wouldn't mind giving it a try. What I do believe is that we are moving toward a world that will increasingly put a value on "real" things. The sooner each of us can start participating in that process, the better. I also think we are entering a period where conservatism will increasingly be the watchword in terms of weighing capital gains vs. capital preservation. Lastly… I think we are still moving toward a more homogeneous world, where our economic interconnections will be greater than ever and will outweigh our cultural differences. Anything we can do to put ourselves in a position to take advantage of that the better.

December 1, 2008                 Inflationists vs Deflationists

6:30AM New York time. This is going to be an interesting week for inflationists. Best I can tell, there seem to be two schools of thought that have formed out of the Financial Crisis of 2008. The first are the deflationists. They largely prefer the Japanese recession model. That is where amply liquidity is made available by the authorities but there is in fact little demand, as both businesses and private individuals cut back on both spending and borrowing. In the case of Japan… it was never so much private borrowing for spending as it was borrowing for investment. That model would fit the classic "pushing on a string" interest rate policy description. Deflation is the result of collapsing demand in the Japanese model and (as in their case) a protracted recession ensues. Some would argue they are STILL in that recession… having never really expanded for long out of it before this latest economic shock hit.

The other camp is the inflationists. They say all the liquidity in the system will ultimately weaken the dollar, which should and will, lose its status as world's reserve currency. Gold and other hard assets will begin to increase sharply in price as global participants lose their faith in fiat currencies. Some of the most vocal critics of the status quo system find themselves in this group… Jim Rogers for one.

There are of course, various hybrid groups and views that find themselves somewhere between the two range ends. The most common view I hear in this camp, is that we will start off in a deflationary, high liquidity situation as the markets and the global economy finds its footing again, but then move into an inflationary situation as the global economies bottom and aggregate demand picks up again.

I have found myself of late in the inflationist camp. Not so much from a macro-economic point as from a capital market price action standpoint. Stocks had gotten pounded through October and November. That (along with various technical factors) drove US Treasury note yields sharply lower. The dollar had bull run of its own as deleveraging and repatriation of capital into the US was in full force. That took gold and a host of other indicator commodities lower. It was my view that stock market negativity was driving a lot of this. Once stocks stabilized, the dollar would start to come off again and the indicator commodities would put in a bottom. I was simply waiting for some kind of exhaustion signal in stocks to initiate a couple of positions. Well… stocks are making a good case for an intermediate (if not longer-term) bottom. The news of the Citi bailout came with calls for changes in mark-to-market accounting and the appointment of Paul Volker as head of the Obama economic recovery advisory team. Stocks rallies four days in row, something they hadn't done since May. Finally… it was the shorts who were put in an uncomfortable (albeit temporary) position.

Unfortunately… during that rally, when the dollar and gold had the opportunity to make some important technical progress of their own… they did not. Sure it was a nice run off the lows for the gold. And the dollar had a couple of weak days there. But on the charts nothing has changed. Worse… the stock market has expended a huge amount of corrective energy… a performance I would not bet on it repeating this week. And US Treasuries… technical factors or not, have made it look like a powerful wave of deflation is upon us. The capper is a constant barrage of weak economic stats on an almost daily basis. Despite their coverage… the weak economic numbers should not at all surprise after the predictive movements in the capital markets for the last 18 months.

So here we are… starting a new trading week… with my personal positions (with this morning's early price action) now underwater, and staring down the barrel of a week that could see the stock market give back a good chunk of gains from last week. I could close my eyes and take the leap of faith that everything will hold and the dollar and gold will continue to carve out their own new directions… lower and higher respectively. Or… I could cover my ass and go back into hiding for a while, waiting for a new opportunity. My leanings remain toward not trying to be a hero. It may be a more prudent strategy to see where all these markets put in their respective corrective highs or lows. If stocks and gold can put is a higher low, and the dollar put in a lower high. That type of price action would give me a bit more to hang my hat on than just picking some arbitrary corrective point and saying the bottom is in. Better to get this right that get it too early.

November 28, 2008             The Wise Man…

6:30AM New York time. It's said, the wise man knows, or is willing to admit, how much he doesn't know. And if there is one thing I can say about the outgoing Bush administration… they always tried to tell me they knew exactly what was going on and how they were going to take care of it. I remember Dick Cheney on a TV talk show saying they didn't need a public mandate to carry on in Iraq. The idea being they knew better. Ahhh… the arrogance of a bull-headed aristocracy. So I find recent statements and actions by the incoming Obama administration a refreshing change. He does not pretend to know everything. And he does not operate at the center of a tight little, closed clique that does not allow a dissenting opinion. Instead, he seems to seek out people of experience and intelligence to help him in those areas where he comes up short. THAT is the mark of a wise man. My Republican leaning friends of open mind are already starting to swing around to the view that the guy is showing some encouraging signs. How can anyone argue with the choice of Paul Volker as leading his economic recovery advisor group? You know Buffett is in the background somewhere there too. Those are just two.

Sure… there will be people like many who listen solely to conservative radio who will never come around. Eight years after Clinton, they still find nothing better to talk about than the ancient history that went on in that administration. I can imagine Rush Limbaugh 4 years from now… with the last vestiges of his radio audience finally wheel chair bound… still clinging to a bitter mantra of the evil "left", and lamenting the erosion of true Republicanism, looking desperately for others to fail so they can feel better about themselves. They are a sorry lot.

As for markets and the economy on this US holiday expectedly light session… I wish merely to make my peace with readers. Regular visitors to this column know, I have never stressed much economic or monetary data and analysis in this column. My reason has always been that there are plenty of people and pundits doing enough of that. Instead… I have always kept to a more observational stance, stressing the psychological aspects of markets and the dichotomy between price action and data as an indicator of sentiment skew and trade opportunity… frequently using my own emotional state as well as those I speak with and hear as an indicator. Lord knows… these last few months have seen some of the most "emotional" markets in a generation. Interestingly… these extreme conditions have resulted in an even greater search among participants for the fundamental reasons as to why and where next. So, as I see it, more and more people are looking harder and harder at the data at a time when the implications of that data and their value as a driver of future capital market direction has actually declined. Trying to figure out the "true meaning" of any combination of fundamentals has become even MORE difficult. Certainly the fundamentals have gone from bad to worse. All manner of monetary and economic data reside in historic territory. The problem as participant is that the levels to which the markets have priced in these fundamentals has gotten extreme too. So more than ever… the ability to predict the future course of the capital markets has gotten even harder. Perhaps that has resulted in an even greater frustration with the lack of fundamental coverage in this column, and a search for answers elsewhere. I do not apologize for it and I wish everyone good luck in searching for your own answers. I still fell it is better to do no job at something than do a bad job at it. I do however think that as markets calm down… and they inevitably will… that my particular methodology will become safe to use again… and critical to those observations is the need to keep an open mind as to what directions the markets will strike out in. Like during a storm, when there are huge flows of air and water, so too during economic storms, there are huge flows of capital. But storms eventually subside and the flows of water and wind swing around. That will happen in the markets too. And just as it is a natural strategy to hide during the storm, it is also natural that we start poking our heads out the door as it subsides.

November 26, 2008                 Holiday Conservatism

6:30AM New York time. A statistic I heard on the airwaves yesterday said the last time the major stock indices were up three days in a row was in August. I'm not sure if that's right, and I'm not sure if yesterday really counts. The Dow was up just modestly and the other indices were mixed. Statistically I'm just splitting hairs. But I have two rationales for my observation. First… I would love to see the markets start calming down a bit so I can slowly get back to using MY trading methodology again. That is… taking advantage of counter-intuitive price movement on news with an overriding macro theme. The markets have been so volatile and jittery; there has been no reliable progression from one day to the next of what I would call a typical overbought/oversold condition. You might get a reversal one day only to have the markets open up the following day having taken it all back. I'm sure lots of participants have been driven from these markets and would love the opportunity to start getting their feet wet again. Major pivot points in the markets and the economy create tremendous opportunity to establish big macro trades. I don't think anyone would argue, we have just gone through a period of market turbulence of historic proportions.

Secondly… I believe if we finally see some stabilization in the equity markets we can start to look forward (with a lag) to some stability in the real economy. Obviously, the real economy still has quite a bit of catch-up to do with the capital markets. And that negative data will be a constant irritant and drag on the equity markets. However… if the downside, for the most part, is largely played out, then price action to the downside will be increasingly sticky, even if not a great deal of headway is made to the upside. Only time will tell if this theory plays out. Oddly enough… gold investors should probably be hoping for this too, as stability in US equities, translates into greater stability in global equities, which means reduced capital flight back to the dollar, which ultimately means an end to our current short-term deflationary condition, and an actual freeing up of all the pent up liquidity pumped into the system, which, will ultimately take gold higher.

Systemic shocks such as we have seen can lead to more rapid change in the underlying economic system than we would normally have. Sometimes the process of evolution is actually a quick and violent one brought on by major change. I can point to my own family as an example… we have decided to trim gift giving way back this year. Typically all the siblings and parents would buy for everyone. It WAS pretty crazy. Not this year. We haven't decide if per gift amounts will be limited or if we'll grab bag which sibling to buy for. The point is… we can all adapt fairly quickly to new realities.

Again… and perhaps because of my personal inclination toward a positive outlook… all of this ultimately had to happen and over time, will be a good thing, leading to a far more homogenous consumption/production situation on our planet. I hope I live to see it. We have certainly had a gun held to our head in terms of starting the process.

Just so you know… I have begun to trade again myself. I bought a small gold position on Friday and added to it yesterday.

November 24, 2008                 OK… Who's Left?

6:30AM New York time. At last Citigroup has come to the trough. After months of warnings from analysts and pundits that Citi would be the next… here it is. Is anybody left? Was Citi supposed to be the last? It's a key question for me and I think for everyone connected. Do we finally know the line between the banks who were (more) prudent from those that were not… those that remain with a safer capital base and those that do not? Can this possibly be a sign of capitulation among the financials?

I had a conversation with Dave Lewis the other day. In it, I expressed my frustration with the observation that a decent percentage of us humans, on an individual basis, can recognize when we are "caught up" on an emotional basis with events around us... or at least understand that the state exists making conditions susceptible to reversal… and leaving our decisions wrong in the end… but allowing us at least take steps to guard against a reversal. Unfortunately… we decided that the 20% of the population that has the ability is not enough to outweigh the 80% that don't. It's kills me. We stand (as a group) on the verge of monumental, future-changing discovery, and we just can't get enough critical mass to tip the scales in favor of behavioral consensus. And we've been caught with those same ratios for a thousand years… caught in a repeating loop of booming and busting…. and setting ourselves back repeatedly from a breakthrough that would help not only collectively… but individually… on a massive scale. And once gain… what we are left with for that inability, are the periodic episodes of bust such as we are working through now. Ahhh… what a boon increased self-awareness (with a dose of humility) would be. Oh well… once again… we collectively need to touch the stove to learn that it is indeed hot.

And yet… that emotional tendency … and the need to act on it… still runs both ways. So I ask the question this morning. What's left? The saving grace and offset to our emotional tendency is a remarkable ability to recover emotionally. We are resilient. We bounce back. Or perhaps more appropriately… we quickly adjust to our new realities and start to work out way back out. Just as those who gleefully lent money to unqualified buyers with no money down 2 years ago have seen their error… I ask the question… at what point does the collateral damage take asset valuations down to points where they are a better buy that a sell. I suppose my answer will be the same one I got from bulls when the top was finally in place. The 80/20 ratio still exists. I simply ask the question. When those two mortgage sector hedge funds of Bear Stearns first announced problems… signaling the beginning of the bust… how many of us heeded the warning and took drastic action in the markets. That's not the way it works. These things are an evolutionary process. Taken against the backdrop of the time, my guess is that the majority of participants thought the problem was workable, or at least had no idea that it would eventually take us to where we are now. That was then. This is now. If you respond (in your mind) to me emotionally with a resounding NO… ready to pounce down my throat for even suggesting it, then I ask you to simply take a moment to look inside… and ask yourself what drives your response. If you can point coolly and calmly to other events and developments, which you think need to come to fruition first, then I think you are in good shape. But if you are simply wringing your hands with glee at Wall Street's (or America's) demise… wanting for more… then I think I have made my point. Look… I don't HAVE and answer. I simply pose the question. When I worked for George… I saw more than once how our macro would turn around significant events. And sometimes those events were not necessarily seen as significant at the time. I am not saying the fall and rescue of Citi is a significant event. It is simply the latest event in a chain of events that has taken us from one end of the market psychology curve to the other… from giddy glee to desperation.

I was early in calling a top to the housing mess. I have been early calling and end to the bottom. I can be ultra-sensitive to my own place on the emotional scale… leading me to not allow things to play out all the way. I continue to work on that too.

November 19, 2008                 To My Simple Mind

6:30AM New York time. It is a "fairly" quiet morning this morning. Stocks are a touch weaker with no follow through from yesterday's close and bond yields are down once again. The deflationary argument side continues to hold sway despite record borrowing for the US (and many other) governments ahead. I wonder if is a comparative calm before the storm. The "behavioralist" in me has been wondering lately if the selling in equities has finally, for the most part, run its course. The technician in me is not nearly so optimistic. That side sees the current trading range stall in equities as nothing more than a big declining wedge… typically a formation that generates lower and lower highs until it simply falls off the cliff. What makes these patterns so deadly is that participants who have been buying on the repeated moves back to the lows, either short covering or "bargain" hunting, find themselves quickly underwater and come back in to sell en-masse. That along with those seeking to participate in the "breakdown", create yet another selling rush, which, in this market, could generate some substantial downside. Only time will tell but I am currently steeling myself against what looks like a better and better possibility each day. As I prepare to head out and fill my second batch of orders for the week, at 22 degrees and 25 mile per hour winds, I can tell you that things tend to go wrong not when you're prepared… but when your pants are down.

We were talking in the office yesterday about the concept of money. And honestly… I am no monetary or economic historian. While I fully understand that currencies have come and gone throughout history… and that gold… and other hard assets have been around for millennia too, there is no way I could hold a candle (or argument) in this case with someone who has spent a lot of time looking at monetary history. I stay within my role as an observer of current events and simply try to suggest ideas that might work going out. In the past twenty years, we have seen some life changing technology take hold. Individuals around the world can communicate almost instantaneously. A universe of information and opinion has opened up. Do we think that we are ever going back to the way it was before… hard media… information on paper or worse… stone tablets? If there is one thing we can count on for our species, it's a relentless quest for technological progress and innovation. Should not the concept of "money" change along with that? And what is "money"? Dave Lewis calls it a tool. I say it is simply a medium of exchange. One has to produce a good or service valuable for trade first before we can be in a position to need a "medium". It doesn't really matter WHAT that medium is. It simply matters that it is acceptable to all the parties involved within a society that has division of labor and trades amongst each other. The true "worth" lies within the good or service itself, and the fact that someone else needs or wants it. Early Europeans took advantage of the fact that Native Americans used "wampum" as a primary medium of exchange when they arrived and began trading with them. They saw it as an opportunity to take advantage of primitives with what was a simple and plentiful substance. But prior to their intrusion, within the relatively closed system of the natives, the "wampum" medium worked just fine.

I have two points. First… in those same last twenty years of steep technological innovation, we have also increased the debate many fold surrounding currency valuations, interest rates, and economic policy. We have created a vast, global financial system that analyzes, manages, and trades the various currencies, along with a number of hard assets. So a great many of us these days, are involved, not with specific goods or services themselves, but with the medium. That's part of our problem. As a goods producer, I personally do not care whether the medium is UD Dollars, Canadian Dollars, or… wampum credits. So long as it is acceptable to all parties as a medium of exchange… within our system… in trading value for value. What difference does it make? The second point concerns ease of operation. I don't want to have to carry around a wad of some currency… or God forbid… a big bag of wampum (though I could lay my hands on plenty). I LIKE the fact that I can sell my product, and with that "credited" value, buy other goods or services I need, all without touch a piece of currency… or wampum. The future lies ahead… not back. If that means the adoption of a world currency 50 years from now, so be it. I don't really care. The point is to have a good or service that others need or want. THAT is what SHOULD determine the wealth of a country. Right now… the United States (in aggregate) is not producing an equal amount of needed/wanted good/service as many of its trading partners. That is a very broad statement as many of its citizens do… and many don't. The cure for it (over time), is not tinkering with the medium… that misses the point. The true crux of the biscuit is increasing the aggregate production of wanted/needed goods or services. If we want to fix America… and her economic system…that is what we need ultimately to do. There remains much discovery and innovation in all manner of fields left to uncover and develop. The commodity area is bursting with them. Do you think our global demographic challenges in food and energy have gone away simply because we are currently in a global recession? Even near term… there are always new products and services to capitalize on. Ultimately… less financial product salespeople is not a bad thing. My guess is… if that begins to happen in the next economic cycle (and I think it will)… problems and questions regarding the "medium" will take care of itself.

November 17, 2008                 Just Killing Time

6:00AM New York time. As you know I have not been keeping on the financial news as much lately. With all the volatility, it's been more of a "check in at specified intervals" kind of thing. So when I flipped on the TV Friday afternoon about 3 and saw that stocks had recovered from most of their earlier losses, I thought… OK… interesting. But when I checked back in after the close to see that they had dropped about 350 Dow points in the final hour of trading, the descriptive term that popped into my head was… childish. It appears that participants (both investors and traders) are still not comfortable with the idea of making informed "rational" decisions in this market. Perhaps you say such price action is indeed rational. And that it's just a function of the line that has formed at the door for people who have "rationally" chosen much earlier to leave the "theatre". That's your opinion and you are entitled to it. But since we have seen such volatility BOTH ways lately… I tend to be of the view that participants are still emotionally charged, and as they continue to react emotionally, price action (and volatility) is being exacerbated by short-term traders who are stepping in front of that emotion.

I see in the news Congressional Republicans are digging in their heels against a bailout of the US auto industry. Right or wrong aside… I find it interesting that those same representatives found it so necessary to get a bailout to Wall Street, the very fomenters of much of the current crisis, and yet, they are now reluctant to throw a similar lifeline to one of the largest industrial producers and employers in the country. I suppose it demonstrates the kind of salesman Hank Paulson is in getting Congress and the country to buy the "indispensability" concept for a handful of big commercial and investment banks. As I look at things, it is hard for me know if the bailout and subsequent TARPS program has actually helped. Your guess is as good as mine as to where prices would be in the absence of the program. It is especially hard to break out cause and effect when the Fed has taken so many additional steps to provide liquidity to the system and act as the guarantor and buyer of last resort of so many other forms of credit. My personal sense is that, if we had let firms fail, and just made sure the Fed was there to insure deposits, we probably would have seen price action similar to what we saw anyway. So in the end… the market was going to sort things out one way or the other.

I saw the 60 Minutes interview with president elect Obama last night. I have to say… he generally seems like a decent, likable guy. His talk seemed as unscripted as any I have seen a President make, and not once did he embarrass me as an American, something George Bush could not seem to get away from.

If it seems like I am just killing time before talking about markets… well… you've got me. At this moment, I haven't even looked at where the markets are. In fact… if I just stay inside my little house of oysters… it will appear that nothing is wrong. Our new sales approach seems to be working. Business (for me anyway) has not fallen off as I expected it already would… and I am back to my more normal anxiety of worrying about not having ENOUGH oysters this winter to satisfy demand. In just a couple short weeks we've been able to pick up some new accounts… in fact… every single prospect we approached wants to take product. That's a pretty good sales closure rate. I'm still going to treat things like business is going to drop off pretty sharply after the holidays. It tends to anyway, seasonally, and this year we have our extremely negative economic backdrop. The way I see it, I'm going to sell every oyster I can between now and the holidays… and if it slows after that… there are worse things than to put in minimal time on the water when its 20 degrees out. Besides… this is starting to look like it's going to be a cold winter.

OK… I just checked on the markets and so far… it's actually a pretty quiet morning out there. Despite my continued declining connection to the financial industry and my choice rather than need, to trade or not trade… as it were… I still find the volatility and that "next morning's open" factor extremely nerve-wracking. For everybody's well being… I just want things to calm down a bit… allow an opportunity for "rational" decision making to start filtering back, and trying to decide what's really worth what out there. I currently have no positions. I've been able to keep my P&L largely steady through all the turmoil and despite trying to play most of these markets from a contrarian angle. I still think a steeper yield curve and a lower dollar are part of that trade. But nothing in the price action I see right now indicates a change toward that direction. Participants continue to bet on deflation and lower (or at least stable) rates across the curve. And the dollar still seems to have "safe haven" status. On the upside, while deflation may not help my trading view, it is an unexpected help to the middle to lower wrungs of the real economy income ladder. I'm in that group. It is still not going to be a comfortable winter for many, but it will be a bit more tolerable with oil at $60 than it was with oil at $140. The big question (I think) for the economy and the other markets remain… where the stock market goes. If the lows are in… or close to it… then (I also think) we can also start to see a low being put in for the economy in the next 6-months. We may crawl out the other side a battered and very much different looking economy… but at least we can look forward to crawling out. And, so long as the lows are in, we can look forward to crawling out without all of the dire predictions of hyperinflation, widespread bank system failure, and even localized civil unrest having come to pass. But we still have a long winter ahead of us to get through first. Every day remains an adventure and it remains to be seen if the worst is behind us.

November 14, 2008                     I Hates That Rabbit

6:30AM New York time. That was a line Yosemite Sam used from time to time after he was blown up, run over, lured off a cliff, or got caught up in yet another one of his own schemes to do-in Bugs Bunny. Bugs ALWAYS got the better of him. That's kind of the way I feel about my own trading lately… more specifically the stock market's ability to fu%* with the other capital markets and send them careening one way or another based on its own wild gyrations. I no sooner stop myself out on Monday in my short bond and short dollar trades, which, by the way looked like good ideas right up until about noon yesterday, when stocks began their recovery and sent both bonds and the dollar into a tailspin. Nothing happens slowly in these markets, and yet for the past month we have been essentially trading sideways in stocks between 800 and 1050 basis the S&P 500, with historically high volatility… and with all the other markets acting like the tail on the dog. I have no problem trading stock indices from time to time in the right situation. But I DO have a problem trying to position in the other capital markets when they are a slave to every wiggle in equities. I'm sure the last thing gold investors want to deal with is the harsh reality that presently their market has about a 90% correlation with equities.

The most logical two choices are simply… stay out of the markets until the current correlations start to break down… or cut to the chase and just trade stocks. I guess there is a third… and that would be to acknowledge the correlations, be incredibly patient on those other markets such that I am in a position to initiate trades at points where the stock market is making one of its trading range turns. Hmmm… sounds simple… but is it? Lets see. What would I do today? First off, its Friday… a classic day for FU trading… a perfect day to reverse the weekly activity and take all the money back from those who thought they had a good couple of days… and after those who had accumulated positions LAST week had tossed in the towel on this week's swoon. Essentially… a perfect day to make sure nobody is making any money. OK… so that means the market runs a bit and heads back toward those trading range highs. Does that make me want to do anything in bonds or currencies? Only if I want to try and be nimble and catch the one or two days more of weakness before participants start looking for new direction next week. A reversal Friday along with a big weekend meeting in Washington where finance officials from all over the world are going to pledge their commitment to do everything they can to ease the crisis and improve the economic environment should also be good for a higher opening Monday morning. Do I want to jump on board at this point, with this volatility, in a short bond/short dollar trade that, after talking it all out, could comfortably last to mid-day Monday? I can't dilly-dally. S&P's are, for the moment, down a bit. That's the lower opening in stocks I need to generate the higher opening in the dollar and bonds that I should jump on to initiate!

Sounds pretty stupid when put in that light doesn't it? Taking a HUGE macro view and shrinking it down to two freakin' measly days of trading just so I don't get a new assho*% ripped in my P&L. To make matters worse… the longer term player in me is reminding me that the correction I am talking about in stocks is just that… a correction. The reality is we did print a new low yesterday even though the market came back. If I believe the "trend is your friend" mantra, then I should be simply waiting for the rally to run out of gas to SELL stocks and then BUY bonds and the dollar! Not something I really want to do. Perhaps what this exercise has told me is, unless I want to sit in front of the screen all day and trade back and forth, that option one is really the way to go. Stay away until some of these correlations break down and the markets get back to carving out their own directions. It is an arguable point how much real macro capital is flowing right now anyway. We have markets dominated by short-term traders… guys and gals who are much better at that game than me. What I seem to have convinced myself of is that I have to continue to be patient, to wait for opportunities that present themselves on my terms, and to not worry (more now than ever) about missing some big directional move.

November 13, 2008                 Back To The Lows

6:30AM New York time. Sorry no post yesterday. My father-in-law passed away this recent weekend so his commemorative services were Tuesday and Wednesday. And (surprisingly) the hotel we stayed at had no in-room internet access… despite the moniker of "executive room". Given the situation, I was simply not in a mood to make an issue of it. Having a family member die in a quasi-unexpected situation can really put "life's problems" in a different perspective.

I heard on my local radio news that while home sales in my neighboring state of Rhode Island had a big jump in existing home sales. That was offset by a 50% reduction in the median sales price from year ago levels. The culprit in both cases… sales of foreclosed properties. I know that similar statistics are being recorded all across the country. While some may view these statistics as grim for the housing market, to me, it represents a much-needed turnover of inventory. While it is a painful process for those on the wrong side of it, it is this transfer of ownership from weak hands to strong hands that is a major part of the "healing" process.

Meanwhile, stocks took a big whack yesterday and are now right back to their lows for October. I still think we are carving out a broad trading range for the equity indices and points such as we're at represent a better short-term buying opportunity than selling opportunity. I don't say that because I'm bullish… I simply say that because the risk (in terms of S&P points) of stopping yourself out if the market trades to new lows is a lot less than if the market trades back up to the recent trading range highs. I am not sure I'm going to step up to that trade myself, but if I were… a purchase above the lows with a new-low stop would be the first foray, and if lows are breached, then a purchase on the first close above the old lows as sign of exhaustion and failure would be the second. Obviously… if we trade to new lows and continue lower, I would be proven wrong on the whole trading range concept anyway.

As a result of the weakness in stocks and its effect on other markets, I stopped myself out of both my short dollar and short bond positions. Both positions were underwater and we're showing no signs of relenting. These are NOT markets I want to try and be a hero in. I want to catch moves where momentum is in my favor, not where I'm fighting momentum. I generally don't like to step in front of my own pre-determined stops set at new price points, but sometimes the action looks so obviously like those levels are eventually going to be targeted, it makes no sense to me to stay involved and piss money away. I hear more than a few participants (including myself and especially those who are extremely bearish) who think the Dollar must go lower and long-term rates have to rise. And perhaps that will eventually be the case. But right now… in my trading time horizon… bonds seem to be following a Japanese-style deflationary contraction model while the Dollar… I guess that's a flight to "quality"? Whatever the reason (and reasons abound), neither trade looks like it's ready to blossom yet. The current capital market trading relationships are some of the more surprising developments of the crisis.

November 10, 2008                 I'll Take That Bet

6:00AM New York time. The first headline that popped up when I opened my news page was: Asian markets soar on Chinese $585 billion stimulus plan. I just bet they did. After all… this IS a GLOBAL problem! Personally… I think markets around the world were already in the process of healing themselves before this. Perhaps "healing themselves" is a poor description. Stabilizing is probably a better description. I've been saying that for a couple of weeks now and watching US stocks trade on Friday, after the release of the Payroll data confirmed it in spades. The two-day correction that ended Friday saw the S&P 500 give back about half of the gains it had made in the run up from the lows. So to me, it made sense that somewhere in the "normal" retracement ratio realm of possibilities, we were going to see a higher low put in. I have seen nothing to convince me otherwise, that we have embarked on a long, arduous, broad, sideways trading range for equities. And while that range may have a slight upward bias… it will most certainly NOT be a market where you can simply buy averages to hold for gains. As I have also said… the best part about that development is that it will finally free up the other capital markets to trade somewhat independently, re-establishing their own macro bias', rather that have all their movements tied to every wiggle in the equity markets.

I continue to be on a diet of "light" news and almost zero commentary. And that will continue so long as price action supports my theory. Tied in with that theory is a resumption of the weakening trend in the dollar and a gradual climb in long-term interest rates. Those are the two trades I have on from an "macro" standpoint. I also reserve the right to trade stock indices on a strictly short-term basis. In fact, if I had any ass I would have bought the close Friday. That was a perfect setup... modest up close after two huge down days. Next upside target looks like 1050 in the December S&P futures. For the record, I am short a small Dollar Index position. There, I think the current triangle resolves to the downside and the recent October highs of 88.70 (or so) hold. In 10-year futures, I think the recent 116-½ highs hold as that market resolves to the downside as well. Once again… the fact that bonds could not close higher after Friday's Payroll number tell me the current run to the upside was about played out. That's about all I have on markets. For those who want a deeper, more complex analysis, it abounds out there with the click of your mouse. In a heartbeat you can find compelling commentary that runs the gamut from hyperinflation to deflation, imminent recovery in stocks to new and far deeper lows. Take your pick. I myself and going to try my best to Keep It Simple Stupid… match up news with price action and see what the markets tell me. So far, I have not been disappointed.

And one last note on politics… I have to say… my Republican associates and others I have met since the election have stuck me as a very bitter, spiteful lot. To a person, the distinct impression I get is that they WANT Obama to fail so they can come back with a big collective waggley finger and say, "I told you so"! Geeze Louise… their guys had 8 years in office… fuc@*% everything up… lost fair and square in the election… and now they won't even give the new guy a chance to prove his mettle. And he hasn't even officially taken office yet! I suppose I should treat it just like contrary opinion in the markets. The fact that these nitwits are on the other side of the trade is actually a good thing. And from an odds and timing standpoint, Obama is sitting in the catbird's seat. I mean… think about it. The guy inherits the country and the economy at what is arguably a bottom (or pretty close). And he has a full four years to preside over things getting better. Notice… I didn't say "make things better". That is a bet I would take in a heartbeat! I think FOUR years from now… even by accident… and even if the real economy takes all 2009 to bottom… we're going to be in a better position then than we are right now.

November 5, 2008                 History Is Made

5:30AM New York time. Well… for better or worse… the United States has elected it's first African-American president. History has been made. And for what it's worth, the country has voted out 8 years of abject foreign policy failure in favor of something else… not even knowing what that something else is yet. We also voted out 8 years of Republican "free market" thinking after what amounts to the biggest corporate bailout in history (not REALLY hard to do) and a virtual nationalization of a big chunk of the US banking system. And once again… we voted that out in favor of something else… not even knowing what that something else is yet either. And I cannot think of a better definition of complete failure than when a citizenry is willing to strike out in a completely unknown direction simply because the path they are/were on has led them so apparently astray. And to her final hour, Sarah Palin, newly appointed poster girl of the Republican Party, continued to bang the old drum of maintaining military spending, opposition to abortion and gun control… still trying to put lipstick on those pigs. Good riddance.

Now, on to the markets. If you had put all of yesterday's ingredients of; higher stock markets, higher commodity prices (led by oil and gold) and a lower dollar together, what would have been your bet on what the bond market would have done? Yeah… I was wrong too. For whatever reason, participants chose to pile (yet again) into US Treasury securities. "Experts" would tell you it was because of the weaker economic stats. They would however, be careful to ignore the fact that equities powered forward despite those same stats. No doubt, there would be a convenient (and completely logical) excuse for that too. In fact, I would have further guessed that with the flight to quality trade receding, DOWNWARD pressure on bond prices would have been even MORE apparent. Whatever… somebody or some bodies were in there buying. I remain short a small (and frustrating) position in 10-year notes. I am also now slightly short the Dollar Index. I put that on yesterday morning. We had a lovely bounce off the recent lows that took prices about halfway back toward the recent DXZ contract highs. To me, that was an ideal place to initiate the trade with a stop just slightly above those highs. I would have thought it was a good trade even without a macro view… just from a technical standpoint… especially given the recent huge rise and flight into the US currency.

This morning the Dollar is slightly higher on the Obama victory… OK… sure. Wouldn't it just be a pisser if Obama turned out to be the best thing since sliced bread for the markets? Hey… his timing couldn't be better. I mean… after all the carnage we've already seen and then having the election just past what many are starting to view as a momentum turn in equities? The world is full of irony… timing is everything… and it's better to be lucky than good anyway.

I guess if I want to finally get on the right track with these bonds I'm supposed to sell them again here. I mean, I did say I had a very small position and was waiting for some strength to put more on. Well… here's my opportunity. At some point here, you would think the market might become just a bit concerned about the upcoming quarterly Treasury refunding, and all that new debt that has to be rolled out on the curve and sold. Apparently not yet. Or maybe the market thinks that with the smoke clearing, there will be a rush of foreign buyers for these new securities… foreign buyers eager to get back on the track of keeping rates down and thus funding a resurgence in US consumer spending on foreign goods. I mean… if foreign central banks are looking for ways to prop up their economies, that certainly goes down as one of the ways to do it. I guess we'll just have to see on that one. In the meanwhile… it still comes down to a game of chicken and whether or not I my willing to hold the line on my view and not blink. Cluck cluck?

November 4, 2008                 Settling In

6:30AM New York time. We are moving on to the next stage of the credit/crisis/financial-meltdown. That's going to be the impact on the real economy. I have no doubt there will be some rough days yet in the capital markets. But it appears from the price action of the last few days that mandatory selling has abated. So the majority of those who HAD to get out… are out. And if there IS forced selling still going on, it is at least being balanced by new money coming in. My confirmation to this theory is the lackluster reaction in the stock market to some of the weakest economic stats we have seen in 25 years. That's what the stock market does. It predicts the future prospects for the economy. And in our recent case, because of the liquidation selling, prices had gone even farther than traditional predictive levels. What's the big shocker for stock price when GM sales fall 45% mo/mo but the company is ALREADY selling for $5.50/share? It's all in the price. In fact… for much of the bad news we will be seeing in the economy through year-end… it's already in share prices. If there's one thing forced selling can do, its price in a worst-case scenario. Even if you remain bearish… how much more do you think the averages have to go? At a certain point even participants who are/were extremely negative realize that the risk of a counter-trend reaction or even stabilization has grown higher than the risk of further declines. For me… the most significant development in the slackening of deleveraging is that the impact of those stock market gyrations on the other capital markets can now abate. So if you have a macro view… in the currencies, in Treasuries, in commodities, you can now begin to put your toe back into the water and start putting it on. And it may be that some of these markets have stretched themselves a lot farther than otherwise because of recent events. If that's your situation… you should be pleased as punch. If you're itching to sell the dollar… or buy gold… you have been handed a gift. I myself am still treading lightly. While I know the longer-term macro would have us screaming for a lower dollar (as the Fed attempts to reflate and Treasury attempts to sell all that paper), we have been added the caveats that neither Europe nor Asia are prize packages. The US no longer stands alone in the manure. Not that I think a weaker dollar will NOT come to pass… I just think it might take a little longer to develop. The final straw of uncertainty to get out of the way is the election. And we'll have resolution on that tomorrow.

November 3, 2008                Back Tommorrow

6:00AM New York time. No column this morning.  Back tomorrow.

October 31, 2008                 What's An Oyster Drill?

6:30AM New York time. As I have done more than once during this crisis… I start out with an anecdote from my own little world. I realize I have been doing this, more than anything else, to make myself feel better, to convince my own self that I don't have the same future prospects as so many other people out there, and that everything I have worked and planned for over the past 10 years has not been in vain. The new account I pitched last week wants to start taking product… probably as early as next week. As the manager said when I did my follow-up call on Wednesday… "its probably something I should be carrying." I love that… I did a couple hours of research, found an appropriate seafood wholesaler… made contact… sent a sample… and picked up the account. All within 10 days. In the middle of a sour economy and soft seafood sales. I have always said, if you produce the highest quality product possible, you will be able to move it in any condition. Cuba may be an economic basket case but everybody knows the reputation of a Cuban cigar.

OK… I made myself feel better. We'll let that offset the fact that I found pretty significant Oyster Drill* damage on my new crop year bed, probably 15%, and I'm going to have to be out there all winter long cleaning the bottom off of old shell (and anything else they can lay eggs on) to get rid of them. Oh well, some good… some bad.

I don't have very much to say on the markets this morning. I couldn't take it yesterday and put back on a small short bond position. I gotta tell you… my market timing these last few weeks has been abysmal. I've been losing my nerve exactly when I should be putting positions on and then giving in and initiating at exactly the wrong times too. The only positive has been that at least I am aware of it, and that has led be to some very small initiated positions… on the idea that I will certainly get better chance to put the balance on. I did make one decent (I think… and we'll see) trade in my personal retirement account. I sold my Dollar Index ETF and put the proceeds back into an Energy ETF I had owned 6 months ago. Stocks have tried to stabilize the last couple of days but only now are prices starting to recover up to levels where there is more significant technical resistance. Then we'll see where we set the next set of lows. I suppose there might be an opportunity to play this latest Dollar bounce against the recent highs… given the fact that Treasury is starting to make lots of Dollars available. The same would go for a purchase of gold on this morning's pull back. I'm just not sure I'm ready to play that one yet.

* Oyster drills are a major indigenous predator of oysters and other mollusks. They are a type of snail, typically just under an inch long, but each has the ability to eat several small oysters a day. Left unchecked, they could wipe out an entire bed in a single season. They use their rasping mouthpiece, called a radula, to drill a small hole in the oyster. The inserted mouthpiece then injects a secreted sulfuric acid-like solution into the oyster itself, dissolving it, and allowing the snail to feed on the liquid. There are several methods of control, which can be used in concert. In the summer, they lay their eggs on the inside of empty shell, so having little empty shell on the bed reduces their spawning sites. They also tend to be colonial spawners, which means their populations concentrate during spawning season. By continually removing the empty shell, it is hoped that the majority of egg cases (and animals too for that matter) will be removed. The empty shell must be left high and dry to desiccate the eggs. There are also baited "traps" than can be set for them during the spawning season. One thing is for certain. I have worked too long and hard at this to let a SNAIL get the better of me. Or… as Bugs Bunny used to say… "you realize… this means war".

October 29, 2008                 Don't Think…. Observe

6:30AM New York time. To keep things even-handed, I am not looking at the TV or news on up days in stocks either. Don't get me wrong… its not like I don't care about what the markets are doing. What I am trying to keep out is the intraday volatility and the massive volume of inane commentary. I love pointing out paradox. We are in a period of heightened uncertainty… yet SO MANY people out there are throwing around their views about how events are going to evolve. And the divergence of views is wider than I have ever seen it. And there is very often huge emotion behind those views. I'm as off the radar screen as you can get and I'VE been emotional during these events! So here we are, with everyone emotionally charged, throwing opinions (and sometimes money on trades) around, yet underneath it all is a core idea that markets should be about odds and risk and numbers… decisions on trades and investments are supposed to be as devoid of emotion as we can make them. Yet all around us in the news and commentary is fear… and adamancy… and gloating. All are behavioral manifestations steeped in emotion. The way I've been dealing with it is to shut (almost) everything out. I have reverted to my core group of market associates. And more than ever, I try to maintain my objectivity in regard to price action…what are prices telling me? And I have to keep asking myself what I observe, rather than what I think.

While I have said the equity markets are going to be a great trading vehicle, I am not participating in the current trading rally. This one did not set up well for me. I prefer to buy exhaustion bottoms that close modestly well and set up for the next day. Yesterdays rally started well ahead of the close and built into it. One thing I refuse to do in these markets is chase price. Once your trade moves away… let it go. I have no short bond position at this point either. That was actually a misplay on my part. I should know by now that when I put a stop in upon trade initiation, I need to live with that stop. And when I step in front of that stop because I lose my nerve, it is frequently a function of the wrong emotion at exactly the wrong time. It was. OK… move on. The bond trade is going to be a big one and there will be plenty of opportunity to get back on board.

I have abstained from talking about politics for a very long time now… but with the election only a week away I thought I would throw out a few observations there as well... plus I'm out of things to say on the markets. Virtually all of my market associates are deathly afraid of Barak Obama winning the election. They see him as a socialist with the primary goal of redistributing wealth in this country. Obviously most of these people are high wage earners. But I have also been surprised by the number of average people I know whose greater concern is that an Obama win, for the first time in a long time, will give the Democrats full control of Congress and the Presidency at the same time. To me… THAT is the only valid point worth considering. I think the risk that Obama will come in and radically change the tax structure against higher income Americans in the current environment and even through any subsequent recovery is low. We are in a time of economic crisis (or perhaps upheaval is a better word). The idea that EITHER candidate is going to walk into that office in January and start making radical change is crazy. For one thing… much of the impact on the real economy from the financial fallout remains ahead of us. How can any campaign promise be relied upon when the future is so uncertain? Still… I understand the risk of a one-party majority. And I do not think Obama's prior speeches and associations (that scare so many people) are merely coincidental. I acknowledge them. But here are two key points that keep pushing me away from Republicans despite the risks. We need to stop being the World's policeman, and we need to have a different approach in dealing with the Middle East. I continue to hear belligerence out of the Republican side. It's all about staying the course in Iraq and Afghanistan and keeping pressure on our enemies. No offence… but at this stage of the game, we've become our own worst enemy, and we've managed to blow ourselves up better than any outside force could have hoped to do. The second point is on the fiscal side. For all the talk of free markets and fiscal discipline, we have more government intrusion than ever (for better or worse) under the Republicans… and we are looking at the biggest deficits ever. I mean… for god's sake… we've virtually nationalized the banking system! As a pure observer, I would have to say the Republican economic policy the past 8 years has proven a miserable failure. In the end, I keep gravitating back to the idea of change for change's sake… screw the risks… to me the counter trend trade is that he turns out to be a good President and the fears prove unfounded.

October 27, 2008                     Trying To Keep Some Perspective

6:30AM New York time. Ahhhh… another Monday… time to start another joyous week. Dave Lewis passed along an interesting observation of Friday from the weekly Treasury Statement. The gist is that the US Treasury has recently raised almost $400bb dollars from the sale of short-term cash management bills, but has been holding onto the cash rather than releasing it into the system. So the bill sale has actually drained reserves from the system. We had a brief chat about that on Friday. He suggested the Bush team, might be waiting until after the election, because they didn't want to go down in history as having trashed the Dollar and sparked a big run up in inflation. I am not a big conspiracy theorist kind of guy. And an intentional holding back of funds meant to supply liquidity to a system in crisis for political reasons seems to be kind of pushing that edge. So I'm not ready to buy his theory on any Bush team alternative motive. I would prefer to think that there is some larger strategy in play by the "experts" who are seeking to navigate us through this crisis. I'm certainly not smart enough to know.

I was reading through some stuff last night and came across a statistic on the 2000-2002 bear market in stocks. I never realized that the S&P 500 retraced 50% from high to low during that period too (we're actually not quite there yet). I suppose if I had been more closely tied to the tech sector, either in equity ownership or in career choice, I would have felt it a lot more. And I know we had a recession off of that bear market… but the ensuing recession never seemed like a really "big" one either. Obviously this time, because the affected sectors are related to housing, finance and credit, the pain seems to be a lot more serious and widespread. Still, it goes to show that during periods such as this, the severity of the situation is largely viewed relative to ones individual perspective and the degree to which each of us are affected. It's amazing… after spending the day at FXA (which I still do most Tuesday's)… it repeatedly seems like the sky is falling. But once I leave and get outside for a while, I see that people are still going about their daily lives and jobs, and while I can't peer into their minds and measure their level of anxiety, they do seem for the most part like they are carrying on fairly well.

In trying to confirm the whole 2000-2002 S&P price action… I did pull up and examine a long-term chart of the S&P 500 for a bit. And what was interesting there was… looking at it from a purely technical perspective… in 2007 prices traded right back to those pre-dot com 2000 highs before failing. Now we are trading back down (we have a little farther to go) toward the 2002 lows. Again… from a purely technical perspective… you could say the S&P 500 index as a measure of the market as a whole has been in nothing more than a huge sideways trading pattern since the turn of the new millennium. And... this not the first time we have seen this sort of price action. Indeed… if you looked at the time period from the mid-50's through the mid 80's, you would probably say that large retracements (or bear markets if you prefer) and predominantly sideways action was more the rule than the exception. It is in fact the decade of the 90's, which seems to have conditioned our expectations that the stock market should somehow behave "better". I think THAT is more of the unreasonable expectation than the former.

October 24, 2008                     No Comment Today

6:00AM New York time. No comment today. Back on Monday.

October 22, 2008                     Where To Bonds?

6:30AM New York time. Well… there go the bonds… been talking about that possibility for a couple of days now. I don't know if the bounce is tied to stocks going lower. Perhaps it's lower commodity prices. Perhaps its weakness in emerging markets… or the economy. Perhaps it's a little of all three. Perhaps its not related at all. Perhaps it's just a temporary respite from concerns over the amount of additional debt the Federal Government has taken on. Maybe it's the Dollar. I don't know. I don't really care.

I DO know prices had gotten increasingly sticky on the downside these last few days. Meanwhile, the length and shape of the consolidation we broke out of to the upside on Monday very much resembles the prior one back in late September. That one saw a 4-point rally off the lows too. Bond prices had moved sharply lower from 118 (December contract) to 111 ½ in a very short period of time. So lets see… 118 to 111 ½ is 6 ½ points. Half of 6 ½ points is 3 ¼. So anywhere from 3 to 4 points of correction (114 ½ to 115 ½) should not be considered an unreasonable retracement. As of yesterday's close we're just shy of that lower target area. We also have a nice shelf of resistance (also from the September consolidation) starting at just over 114 up to 116. So we're just now getting to areas where I would want to add to my position. And while we could argue both sides of the fundamentals ad-infinitum, the technicals have been fairly clear-cut. Lets face it, fundamental views in bonds run the gamut from a Japanese style deflation and collapse in yields, to soaring deficits and Weimar style hyperinflation, to every variation in between. Obviously my view is skewed toward the higher yield camp… for my own variety of reasons. And from a trading standpoint, you might say I was imprudent to have just sat through the last couple of days of rally. But I have funded this trade fully through my short-term S&P trading, and I have only 30% of my desired position on. So I am willing to take the heat to maintain a small core, and I am fully prepared to add to that, including a little more for trading purposes. The bottom line for 10-year futures is that, since the mid-September highs in price, we have put in two major lower lows and one major lower high. I believe this current correction will result in a 2nd lower high.

Gold is another $10 lower this morning. We're only $18 from new COMEX lows through $740, and I think there's a good chance we see them. I'm not sure at exactly what price point… but I think I'm going to be a buyer of that break. A well-disciplined trader can make money playing the long side even in a bear market. In most cases, there are periodic opportunities to play for those violent corrective bounces. I'm going to look at it exactly that way… as though I'm looking for the point from which the bear market rally springs. So if this entire down move in gold turns out to be nothing more that a big 3-quarter correction in a larger bull market, driven by de-leveraging of long commodity positions, that will turn out to be an unexpected bonus in what would otherwise simply be just another opportunistic trade in an overdone bear market.

One last word on the Dollar this morning… of all the fallout from the current financial/credit crisis, I think the most surprising one to market participants has been the strength of the dollar. Lots of people were predicting gloom and doom for the markets, and certainly some of that has already come to pass. But almost every variation on the gloom and doom theme involved a sharply weaker Dollar. A higher dollar in that environment was not worth considering. The only people who got it right, got it right for the wrong reasons, and for the most part, hadn't been factoring the financial crisis as a factor in Dollar strength anyway. Gilmore mentioned Marc Chandler at BBH as one of those. But as history continues to unfold, it certainly seems obvious that this "unexpected" strength has badly hurt commodity prices and squashed (for now) what many though would be a dangerous inflationary spiral. I say it still remains to be seen what the underlying propensity will be once all the accumulated massive positioning from the managed capital industry is finally off the sheets. But it should also be a sobering lesson to all of us that, even on a massive scale, events can unfold in some very unexpected, counter-intuitive ways.

October 20, 2008                         Plan Of Attack

6:00AM New York time. Stocks didn't trade as I thought they would on Friday. As such… looking at a potential (which turned out to be actual), late day fade… I sold out my S&P trading position at around 3 in the afternoon. My current S&P trading view is heavily based on momentum. When momentum fades and swings in the other direction, assume I am getting out. The problem in all of this is of course that there are DEGREES of momentum. When we've had an average daily change over the past couple of weeks of almost 300 points one way or the other, is a close of down 120 really a big swing? In Friday's case, I deemed it was, especially after giving up intraday gains of 250 Dow points. I still made decent money on the trade. Oh well… nobody said this was going to be easy. The most important thing is not making money. The most important thing is staying out of the way of the steamrollers. So what to do today? Prices are bouncing this morning; global stock markets are in the green. Still, the way I see it and the way I read the charts, the S&P 500 is sitting right in the middle of the trading range I anticipate. That range extends from the 840 or so lows of two Fridays ago, to the 1100-1150 shelf from mid-September. That was the place that the extreme October break originated from. Regardless of positive performance and decent news from here on out, there will be renewed selling (at least initially) when we get back to those levels. This trade is going to be one of patience and opportunity. I don't HAVE to do anything. And I prefer to operate closer to the range ends so as to more clearly define trade risk.

Bonds for their part still act terrible. That said… I still have a nagging sense that we have a big bounce in here somewhere. The current rounding bottom consolidation is only on its 5th day. A similar looking (short-term) rounding bottom took place during the latter half of September. That consolidation took about 8 days to resolve including one very spiky day where one 3-point gain day surrendered everything over the next two. Here too, the watchword will be patience. If the short bond trade is indeed the next big macro trade, then waiting another trading week to make sure I don't add at an opportune time is no big deal. We could easily trade back up to 115 (three handles) and do NOTHING to the negative trend.

Gold is once again getting back to some interesting levels. I am truly viewing gold here as a hedge. I am well aware that so far… the commodity effect of the crisis has been deflationary. The risk however, as I see it, is that recent dollar strength and a good deal of the plunge in commodity prices has to do with leveraged accounts getting out of long-held positions… both outright commodity and equity. So the weakness we are seeing is somewhat artificial. If that turns out 6 months from now to the case, then taking on a gold position into that weakness might not be such a bad idea. I have not decided exactly when or where, I'm just saying its something I want to do before this current down leg ends. And from an observer's standpoint, gold has been making lower highs and lower lows since March. If history repeats and things proceed as they are, I suspect gold prices are going to make a test of their September lows at $740. IF THEY DON'T… that TOO will be an important litmus test of underlying long-term buying interest and sustainability of the down-move. That makes this week kind of an important one for gold.

October 17, 2008                     Trading Markets - Position Markets

6:30AM New York time. Hmmm… what to talk about this morning? I'm prospecting a new oyster account this weekend. Depending on how that goes… I have another lined up after that… then another… then another. Business is just starting to soften, some of it seasonally, and I want to keep ahead of the curve by picking up as much new business as required to maintain my desired level of sales. It's going to be a double-edged sword. I'm glad I have the product quality that HAS allowed me to pick up business fairly easily… but when things eventually DO turn around it's going to be even harder to keep up having cultivated the business. Guess there will be worse problems to have. The first order of business in a downturn is KEEP SALES UP. I figure that's how the really good companies do it anyway… capture market share in a slump and drive your competition out… not that I'M going to drive anybody out… its just that whole survival of the fittest law of the jungle thing.

Right now I have two views that seem to be holding up fairly well on the trading side. On the longer-term macro front, 10-year Treasuries are entering (or debatably already in) a bear market. I have been short now for a couple of weeks and I have to tell you… these things have not put a stitch of pressure on me (knock on wood) P&L-wise. I've been expected them to bounce several times during a couple of these big down-moves in stocks but no-go. There have been days where they tried to rally intraday, but have yet to post much of a positive close. Having said all that… its not like they have moved much lower in price this week either. Their most recent worst day was a week ago today when stocks got hammered and made their recent lows. From my read of the technicals, bonds have about 3 points of bounce in them without doing anything unusual and leaving the downtrend intact. Between 114 ½ and 115 would be a normal type retracement in the December futures and would put prices back up into overhead resistance. Do I think they'll do that? Who knows? I do want to enlarge the position, but at current levels there's not much I want to do. If they move lower then I can confidently sell the ensuing bounce… being well in the black in the original position. If they correct higher then I add to the position on strength. Dave Lewis got me pumped on the bond trade and I completely agree with him… this is a BIG, macro trade that will last many years.

On the other side of bonds is the totally opposite situation… short-term trading the S&P 500. I have been saying since last week that stocks are going into a broad, eminently tradable range, with well-defined boundaries. So far (since last Friday) I am on my second little foray. I bought some last Friday… and sold them out on Monday (one at the highs but then one on the lows). I did the same thing yesterday. I took a chance and bought a position at around 3PM on the idea that participants were having a hard time keeping the market down. I put a stop in, turned off CNBC and flipped on a movie. By 3:30 the verdict for the close look higher and we eventually did close on the highs. I expect a big up day today. I love the fact that we're looking at a flat to down opening right now. I'd be more nervous on a big gap up opening. I think over the next couple of days the S&P futures are going to work their way back up to test 1100. That will get everybody all excited again about the bottom being in and a recovery (in stocks) on the way… making the market ripe for yet another rollover. The early days of a trading range are the best days… before participants really start to recognize what's going on and start stepping in front of each other, condensing the range. While nervousness remains high… the opportunity remains good. So long as participants and commentators continue to wear their emotions on their sleeves, excess followed by turns will remain pretty obvious. The emotion and nervousness (and occasional optimism) flows straight through to Bloomberg and CNBC, and helps give wonderful short-term exhaustion signals at the tail ends. It's actually a classic consolidative condition after a big move. And since this was a VERY big move… one of historic proportions… so it makes sense that the ensuing consolidative range would be historic too.

So they you go. I've got a market I can trade, and I've got a market I can have a position in. What could be better than that? I'm back in the capital market game AND I'm out pedaling oysters. Its even more important during down economic periods to keep your eye on the ball and do what you do best. Down periods separate the wheat from the chafe. At ALL times… up periods and down periods… there will be businesses being run well… and businesses run poorly. If a down period happens to make you a little nervous, and lights a fire under your ass, then perhaps it can be the best thing for you. One thing we know for sure, from the cave going forward… we humans are a pretty adaptable lot. True… we frequently get too worked up and have to get slapped down. But we always seem to get up and come back for more.

October 15, 2008                 Change In Tone

6:30AM New York time. Yesterday and today we're noticeably quieter in stocks. While Monday was obviously a big corrective day, yesterday saw intraday selling but buying interest come in on the close. That is a very different daily behavior than we had been seeing the prior two weeks, when most days saw attempts at intraday rallies but heavy selling on the close. Everyday is an adventure out there but a change to a more two-sided or even light buy-side tone in stocks (I think) will start to signal an end to the "panic" stage of this period. I would love to see that happen. For one thing, once we establish some ranges, the stock market will be a great trading vehicle. I expect the ranges to be broad and stable for quite a while. It will also take stock market contagion off other markets. All other markets have been affected by the break in stocks. If stocks quiet, we'll have a chance to see (finally) where some of these other markets have a propensity to go.

I haven't talked about positions in a while but I have started to trade again. I have a core 10-year note short I would like to build on. I plan on trading both sides of stocks as this trading range evolves, and I AM keeping an eye on gold for attractive downside levels. Gold has been a surprise to me in terms of price action. Regardless of an environment that by the book should be good for gold, futures have actually been making lower highs and lower lows since March. Perhaps the futures are not representative of the bullion and coin market as Dave Lewis was telling me about last week. Perhaps part of gold's issue is the lack of Dollar weakness as ALL world paper currencies are being printed by Central Banks like so much newspaper… so the value of the Dollar relative to other currencies hasn't changed much. Perhaps gold (like so many other asset classes) was simply caught up in the wholesale capital market liquidation that we have just come through. It could also be that gold is caught between the push-me-pull-me factors of lower-demand commodity deflation and monetary inflation. A host of other industrial and agricultural commodities have fallen sharply with the stock market. It's pretty hard to make a case for runaway inflation under those conditions… especially when the most recent experience any country has had with a similarly massive bubble bursting was Japan… and that ushered in a huge deflationary spiral despite every attempt BOJ undertook to reflate. All that probably makes for a more two-side trade with gold though I certainly prefer to maintain a long bias.

October 13, 2008                     Sifting Through Wreckage

6:30AM New York time. Since everybody else is throwing in their opinion… I might as well throw in mine (again). I think last week was the selling climax near-term in stocks. I think we now have the potential for a significant bounce. The vast majority of selling in the last two weeks was managed fund redemptions… forced and otherwise in all manner of managed capital, both passive (mutual funds) and active (hedge funds), and a significant portion was panic selling. When forced selling and panic selling subside, they always leave in their wake bargains for those who have cash. There was a lot of cash on the sidelines even before last week. There has also been a huge amount of shorting going on through this entire period. That too will be fuel for a fire. I am NOT saying this is a long-term bottom yet. Maybe history will prove it to be but that's way beyond me. All I know is that we have now had an equity market down move of historic proportions, which have taken us to the very end of the distribution curve in terms of magnitude. This was a break that rivals the crash of 29. And the peak in volatility came on a Friday… where prices reversed almost totally by the close. And this morning (so far) we are putting some distance between current levels and those lows. Could the recovery this morning get sold into later today and squashed like so many others… sure. But would you bet your capital on that? No… I think a move in the S&P 500 index from almost 16 thousand to 840 in one year, much of that in the last month, when it took 26 years to get to the highs from the post-Volker August 82 low, has a pretty good chance of being exhausted… at least for a little while.

I think a little break would do us all a lot of good. Even people who got much of this event right from a positioning standpoint are throwing out a vast array of opinion on what happens next and how to fix it. But news and price action has been flying so fast that the landscape was changing even before the ink was dry on the last opinion. I can tell you I am personally exhausted. Thank god for oyster land. I could get out on the boat… no news… no screen… and just bury my head in work.

What comes next is the fallout in the real economy. Some of that has already occurred but much more is coming. And we have the same problem we have in regard to capital market price forecasts. Are we staring down the barrel of inflation… or deflation… higher rates or lower rates… or perhaps a smattering of both? Everybody seems to have a different view. Deflation in fuel and foods will change the dynamics of the downturn. Right now it looks like the direction in prices is lower, but that might only be because of the dollar's sharp (and probably temporary) appreciation. Will unemployment stay under 7%… or are we headed for 10? Fortunately it is not my job to have to be right on this. What I do know is that there will be a lot less people going forward getting paid to tell us. The advice I'm giving myself is to keep my thought process flexible. We are in new territory and there may be significant counter-intuitive developments ahead. As far as my business goes… I am assuming the worst. We have already begun a new sales push for our oysters. Restaurant trade is going to be off sharply. But like in any crisis, there is going to be opportunity. We are going to use the cost and quality conscious environment to sell our product directly to our niche market… the intermediate wholesaler. Our goal is to cut out the middleman… the shellfish dealer who typically buys from a harvester/grower (as cheap as he can) and then marks it up 90% for sale to the next size down wholesaler. Guess what… that's the kind of fluff that needs to get wrung out. We are going to sell the concept of "direct from the grower". We are going to be able to offer fresher delivery times and lower prices. True… we are going to have to cast a wider net for the same volume… but that will ultimately give us a bigger market share for when economic activity starts to perk back up again. That's our story anyway. Given how much wealth has been destroyed and how many "easy" retirement plans have gotten dashed… I think there are going to be a whole lot of other people out there building their own "stories". What's yours going to be?

October 10, 2008                 The NEXT Shoe

8:30AM New York time. It's a little after 3AM in the morning. Obviously I couldn't sleep. I was talking to Dave Lewis last night. We talked about a lot of stuff. We're actually going up there in November for a visit. I wanted to tell him that the slowdown in overall activity has finally worked its way into my little world. While oyster sales have so far held up, I'm getting the sense from my current customers that business from their restaurant business is really starting to slow. I guess I just wanted to give him a sense (which I'm sure he already had) that collateral damage will affect even the best "real" products. I told him it looks like I/we will finally have to start working to sell our product… something we have never had to do before. As the conversation went on, he asked me if I was trading? I said no. I hemmed and hawed a little bit about why. One lame reason I gave him was that trading at an at "at risk" institution seemed kind of oxymoronic… I mean, trading air-financial-products at an air-bank. Tied into that was my reasoning that the crisis had passed from "being something removed on only on paper" to being something very real, so trading from the defensive (bearish) posture was kind of like jumping on the pile while good, innocent, people I know are having their retirement nest eggs evaporated. Panics are kind of where mob rule takes over. I'm not sure I can be proud to be participating in that? I had other lame reasons as well. I've been busy in oyster-land… which I have. The last of the seed got planted yesterday; another record year and another 25% increase over the prior year on the same initial nursery input. I think I've finally got this thing figured out. But back to the point, the lame reasons further went on that these markets are simply too volatile to position trade with tight stops while being off at my other venture. We finished our conversation and closed out.

When it was done I started thinking about some of what we talked about. Why aren't I trading? These markets represent not only huge danger but huge opportunity. And Dave (who has been more right than anyone else I know) was saying the longer-term effects have only begun to be felt. He talked about recent central bank actions and where that will eventually take us, one of them being sharply higher long rates. Simply put, central banks, led by the Fed are reflating. And yesterday, I noticed, (though it probably has been happening slowly all along) that US 10-year yields rose sharply despite pronounced weakness in stocks. So far the flight to safety trade has kept bond prices pretty well supported. But what is really happening in the global credit markets? Everybody (though most obviously the big multi-national western banks) is/are taking their cash back (or simply holding on to it) to preserve their own capital bases and provide for operating/survival needs. But who are the biggest suppliers of credit to the fomenter of the original excess… the US? Answer… primarily the Japanese and more recently the Chinese. So the global cascade of capital market destruction is causing participants everywhere to pull their money back home and keep it close at hand, and yet we think somehow the biggest suppliers of credit on the biggest debtor on the planet will be immune from the same effect? Isn't that in fact the logical culmination to the wringing out of 25 years of financial/monetary excess led by the US and financed by surplus Asian (and Middle Eastern) countries? What happens to Treasury yields when the Japanese and Chinese decide they need their money back too, to bring home and shore up their increasingly shaky domestic situations? You don't have to be a rocket scientist to figure that one out, do you? Neither did I. One of that last things Dave left me with (and it's not the first time he mentioned it) was that the next big trade of his life would be to hand his son a 22% coupon 30-year US Treasury bond. And that was the though that kept me up and has me at the keyboard at 3AM… that and the fact that I'm going fishing this morning at first light. It's October in New England and DAMN the fishing's been good!

So have a nice day. I'm guessing you can figure out what trade I'm starting to put on today.

October 8, 2008                     Death of the American Dream

5:30AM New York time. I'm at a loss for what to say this morning. I'm totally preoccupied. To be perfectly honest, I'm not sure anybody is going to be reading this anyway. Markets here and around the world have melted and continue to melt. It is obvious even to me now that it will be near impossible for world economies to stay out of severe recession. And it is happening fast. I'm finally starting to see it in my own customer order flow. My brother who lives in one of the epicenters, San Diego, called me last night to see what I thought and pass along some observations. None of them were good. He referred to it as the death of the American Dream. We are trapped in a cycle of bad, where falling home prices and falling stock prices generate redemptions and margin calls weakening credit more and forcing a whole new round of liquidation. I checked prices and news this morning and then had to turn the TV off. How can you possible knock so much value out of people's retirement nest eggs and home values and then not expect them to be forced to retrench deeply? What amazes me is that there is so far, no evidence of a bottom. Yet knocking 10% off global equity prices every day is certainly not infinitely doable. Yet still, in my area, there seems to be a large degree of oblivion. Perhaps as Dave Solin says, that will not hit home with people at large until they get their next 401-K and IRA statements. I never envisioned myself living an Ayn Rand novel but here we are. All I will venture to say at this point is that I suspect we are in the meat of the crisis right now… perhaps this week. And kind of like a bad day or a bad week in your own personal life, you just want it to be over.

October 6, 2008                 My Own View

6:30AM New York time. 60 Minutes did a piece last night on the financial crisis. I don't usually watch the show. To me they are just another news magazine with a bias. But last night I was curious what their bias would be. Would they paint a picture of growing general economic panic, with Wall Street working to hold the system together for the benefit of the country? No way! Instead they painted a picture of unrestrained Wall Street greed and manipulation of the securities markets, bringing on undue risk while enriching themselves. Jim Grant called the behavior criminal. To me, it was a presentation that would bring on more public anger than public panic. It seemed to crystallize the country starkly along the lines of Wall Street and Main Street. It was certainly poor timing for those House members who are probably already home, and not looking forward to facing their constituents over the Paulson Plan.

I have virtually stopped reading other people's commentary. Everybody and their uncle has a view on the crisis and how it will unfold. And yet, as I see it, the crisis continues to unfold in ways that virtually nobody I listen to has predicted. The dollar has exploded to the upside. Gold has not soared. Inflation does not seem to be the bogeyman so many predicted. Lower oil prices are a great relief. I live on Main Street. And my wife works for a Main Street bank. Business there has gone on as usually and they have continued to lend to qualified applicants (I know this first hand for sure). Meanwhile… I have continued to keep tabs on my own customers, my wife's bank customers, my siblings, my relatives, my friends. None of them report any unusually drop in activity… modestly slower perhaps… but no sense of panic. Granted… virtually nobody out there in this group has any illusions about the country going into recession… they are all pretty much resigned to that. And they certainly acknowledge (as I do) that they will no doubt have to work harder for the same revenue, but most are fairly sanguine about watching their IRAs and 401ks drop, writing it off to yet another Wall Street induced sell off.

That in a nutshell is my view. We have a two-tiered economy. We have institutions and families who have lived, spent and borrowed conservatively all through the real estate bubble. They were never sucked in by cheap credit and they ran their lives within their means. They watched others take the plunge all the while shaking their heads. On the other side we have institutions and individuals who were TOTALLY sucked in by easy credit and escalating real estate prices. They are in a heap of trouble. They can't believe this is happening. I know what side I come down on. I put myself into recession 8 years ago and started accelerating out of it only last year. That's my story. What's yours? There are companies out there who produce real products with real value… there are those that do not. I don't know what side of the equation your company comes down on. Certainly there are innocent third parties, if you are a CFO at a good company but you borrow with a weak institution, you are going to suffer some collateral damage. If you need to tap the commercial paper market like Caterpillar, you are going to have some trouble. Ultimately though… a good company like them will weather that storm.

Once again and for the thousandth time… it highlights the complexity of our system and our economy, along with how we choose to perceive it. Deep down, I really don't give a fu** if two multinational banks whose balance sheets are littered with all manner of derivative garbage are not lending to one another. Wall Street (and the Wall Street press) will tell you it is a disaster. Is that truly so? There are sound banks and financial institutions that will use this disaster to cherry pick assets at fire sale prices much to their future benefit. At any point in an economy there are millions of moving parts, some moving up some moving down. In aggregate, economists define the difference between prosperity (4% GDP growth) and deep recession (two quarters of -3% growth) at essentially 7 percentage points. That's the spread between boom and bust… 7 lousy percentage points! Ask any business person (especially a small business person) and they will tell you that most years the fortunes of their business swing well in excess of 7%. Seven percent is only 7 people out of a hundred. Yet the financial press will treat that swing in the economy as though we're all going to be thrown out on the street tomorrow.

I will not attempt to predict the future. I am functioning only as an observer. The reason being, much of what I observe is counter-intuitive to what many had predicted. I think that may continue to be that case going forward. Does one say the activity in the financial markets is closer to an end or just getting started? Who knows? At some point, shares of good companies will get cheap enough as to compel their own boards to buy them back. Shares of bad companies… well… zero is the bottom boys! I do believe this… both good and bad will come from what is now transpiring. And the financial landscape will be far different a year from now. And the situation WILL force necessary changes that we're not going to happen of their own accord. Near term pain will lead the way to a more consumption conscious future. The era of selling smoke on Wall Street is finally over.

October 1, 2008                         Moral Hazard / The Great Experiment in American Capitalism WAS On / Catharsis / Tainted News

6:30AM New York time. If there was ever a day/time to bend the rules and let myself go for multiple titles, it was today. It's not every day you get to watch history get made.

First off… let me make a couple of observations. If you watch the financial news, you would get the impression that without the Paulson Plan, (of whoever's name is on it now) the entire financial system will come crashing down. If you watch the network nightly news, the Financial Crisis of 2008 is just another news item. When I first saw the original hearings and House members didn't sound sold, the people I talked to in the markets told me I was wrong… this is just for show to the voters back home… I was told. Passage is a done deal. Then the bill failed. Wall Street was shocked and mortified at the initial defeat. And now they are now saying yesterday's rally was on news of the resurrection of the Plan in some other form. If you ask me, equity prices were already recovering BEFORE House members tried to resurrect the "Plan". Maybe there was some talk going around on Monday night to try again, but from what I saw, Asian and then European markets were stable to higher well before there was serious talk that the Plan could still be passed. Besides, if the rally were really based on a resurrection of the plan… why was the dollar up so sharply with gold lower in the aftermath of the defeat? My conclusion; we are dealing with heavily tainted news and analysis from Wall Street. They are fighting for their professional lives and will work to sell this plan and the doomsday scenario for the economy in its absence, no matter how much they need to bend the truth or skew perception. Other than for a quick check of prices, I am no longer watching CNBC at home, nor listening to Bloomberg Radio while on the road. I had thought the bounce yesterday (especially early) would have nailed the coffin shut on the plan, but the financial press quickly seized on expectations of a resurrection as the reason for the bounce. I wasn't watching, but a market friend said CNBC commentators were blasting Wells Fargo for walking away form Wachovia on Monday, saying Wells has the cleanest balance sheet around, why wouldn't they do it? WHY DO YOU THINK WELLS HAS A CLEAN BALANCE SHEET?!! It was and continues to be willing to walk away from what it sees as imprudent risk.

By the way… for the record… at this very moment… as resurrection of the plan comes closer to reality, what are US stocks doing? They are in fact lower. The Dollar rally has stalled and gold is higher. Personally, I think the markets are telling us the direction they want things to go.

When I first heard news of the defeat I was actually excited. Since I, (along with everyone else in the financial industry) thought the Plan was going to pass, I thought the alternative was not worth considering. But once it became a possibility… I found it exhilarating. I have been living through change in a world of counterintuitive result for the past 8 years in oyster land. It has forced me to be more of an observer of events rather than a predictor of events. I gleefully proclaim how little I know. It's like wanting Barak Obama as president. The single biggest draw for me is that electing him would not only make history, but it would shake up the system, make the world scratch its collective head at how fast things can turn around in this country. It's the same for the Paulson Plan. The unexpected outcome was defeat, and the unexpected result would have been the sky not falling, stocks recovering faster than expected, and the whole system hanging together and doing surprisingly well thank you. Not only would we have closure, but we would have avoided serious moral hazard. We would have actually held to our principals, principles that say, if you take risk in a capitalist system, you have to own those risks. When I put a trade on, it's my ass on the line. If I lose, my broker doesn't console me and put the money back in the account. Losing is in fact how I learn to become a better trader. I found myself thrilled that the Government would not be taking on that huge slug of debt. Yes some institutions would fail, some companies would not be able to get credit, but in the end I felt strongly that the system, our American Capitalist System, would survive, recover, and in time, thrive again. The great experiment was on! I saw the news as a positive for the Dollar. Now the federal government would have plenty of money where it was needed, the FDIC, to protect the true innocent third parties, the depositors.

Just two days later we are back in limbo, and the road we embark on is still undecided. In the beginning, I wasn't sure how I wanted things to go. Now I think we have been given a sneak peek at one of the potential outcomes, and aside from one climactic day, that outcome didn't look so bad. I think the other road, the road we continue to force and be force-fed will be far worse.

I'll allow myself this one prediction. If the plan passes, stocks rally briefly and then sell off again, probably making news lows before year-end. The Dollar rally ends and it rolls over, gold goes on to big new highs. If the Bill fails, stocks hold the lows, the Dollar holds its gains, and gold consolidates around current levels. If the bill fails, the sky doesn't fall, banks don't fail en masse, and life goes on. Recession is a foregone conclusion in either case, but hey… we haven't had one in a while and they are part of the cleansing process. The worst-case scenario in my book is passage of the plan, which ultimately proves insufficient; Treasury and the Fed have to go back to Congress in early 09. There is no resolution, no closure… the problem just drags on and on… a bottomless pit of funding that digs the US deeper and deeper into debt.

September 29, 2008                 What Now?

6:30AM New York time. I used to say I enjoyed being an oyster farmer AND having a foot still in the financial arena. Lately… there have been a lot more days when I just wish I had my head completely in oyster land. Following the financial news lately is EXHAUSTING. So now we theoretically have a bailout package. I heard the news yesterday afternoon. I ASSUMED I would wake up and see a bunch of green arrows with a relief rally underway. More like no way. So what's the problem now? Too small… too many conditions… the market's already priced it in? Maybe it's Europe. Recent reports show the European banks are up to their necks in pariah securities too. Fortis had to get bailed out. I have no doubt before this is over the ECB is going to have to pony up a big wad of cash for a similar type bailout deal over there. Maybe THAT'S what the market is saying. That reasoning is supported by a much stronger dollar this morning. Who the hell knows? Personally I can't believe anybody is still really trying to trade around all this stuff.

What is clearly going on and has a long way to go is a massive consolidation in the financial services industry. The bread and butter of our economy since the bottom in August of 1982 has been hobbled… permanently (a very dangerous word by the way) changed. Perhaps I should just say, "changed for our lifetimes". I have no doubt our children at some point will have to deal with some other form of financial crisis. For now anyway… and for the foreseeable future, we as a country and individuals are going to have to make some (for some of us anyway) radical changes in the way we live. Our era of financial engineering is over. We are going back to basics in banking. Conservatism will be the new watchword. And that being the case… yup… the current system is way too over populated by firms, way overstaffed and way overpaid.

Here's a word of advice for you guys… it doesn't have to be that bad. I have said it a thousand times and will no doubt say it a thousand more. You can always buy more stuff… you can't buy more time. Certainly that statement is not going to resonate much with someone who just lost their job at an investment bank and has a big mortgage with two kids in college, especially with the initial shock still very fresh. But trust me… you will find a way through. And once you do… as time dulls your pain and you start to adjust… you may find that a slower pace of life and doing well on less is not such a bad thing. You may actually find that 6 weeks of expensive vacation can be spent just as enjoyably closer to home. You may find that a higher education at a prestigious school does not really mean smarter, more successful kids. Intelligence and drive come from within. You may actually start spending more time with family than at the office. You will have the time to pick up a hobby… read more… relax… get in better shape. Guess what guys… I'm already there and I'll tell you… it ain't so bad. My wife still jokes that we put ourselves in recession 8 years ago when I started doing the oyster thing, when FXA was my chief source of income and I was lucky to scrape up enough oysters and sneak into somebody else's order and sell a couple hundred pieces a week. No I couldn't afford a fishing guide to take me out, do all the work and put me on fish. BUT… I DID have the time to get to know the local shore spots close to home. And you know what? I learned HOW to fish! And I grew to enjoy the WALKS as much as the fishing. I don't even HAVE a recreational boat these days and it's no big deal.

Always needing more that is bigger, better and faster is an addictive game with no end. Yet it is the game we have been taught by our materialist culture. And it is a tremendous distraction from what I feel is far more important and truly HAS an end game… that is to make your life as a good human being, and to be truly READY to leave this world on your last day of life, to be completely satisfied with what you have done in life and to have not a single regret in that final hour. Not from the things you possess… but from the strength of your character, a character that you will pass on to those near you that remain. Indeed, I think our current system of clawing up the career ladder to achieve some measure of "success" is way off base anyway. That climb does nothing for your humanity, indeed and frequently, the better you are at it, the less likely you are to lend a hand to help someone else. In that climb, many neglect their family, their personal interests, simply because of the massive amount of time required. You're going to have a lot more time now. Seize it as an opportunity. Remember this… those that truly leave their mark on our culture and society are often not the richest… indeed… frequently they are the poorest… the artists, the writers, the poets, the musicians, the philosophers. Crises represent both danger and opportunity. Which side will you focus on and take advantage of?

September 26, 2008                 It Just Doesn't End

6:30AM New York time. So now it appears the bailout plan is stalled or even dead. If this IS political theatre, it is certainly drama of the highest kind… some would no doubt say dangerous brinkmanship. And just two days ago everybody thought I was nuts when I suggested Congress might actually NOT pass the measure. Philosophically, economically, morally… this is a huge long-term debate with significant impact. At issue is the very notion of the ability of the capitalist form of economics to mend itself against the notion of a too-big-to-fail government managed economy. I would think Main Street is applauding the lack of passage. Wall Street is mortified.

All along this has been a crisis of great dichotomy. Those that took the well advertised risks are in so much hurt that they and their institutions are close to becoming value-less. Those that didn't take the risks are attempting (and from what I see, quite successfully so far) to precede from a business as usual standpoint. The urban centers where the degree of real estate speculation was rampant and the risks were highest are at the greatest risk. The more removed one is from these centers, the less concern there seems to be. If you talk to the Wall Street crowd, they will tell you the entire banking system is at risk of failure. But if I walk into one of my local banks here… there doesn't seem to be the slightest sense of concern. There are thousands of these small banks across the country and the majority of Americans do business with them. The major money center banks seem to dominate the urban centers. The small local banks dominate suburbia and rural America. Most of them were and remain very conservative lenders. They maintain capital and liquidity ratios well in excess of minimums required. By contrast, it seems like it is a number of the money center banks that took the majority of risk and are now in danger.

Here's a thought that might be driving some of this disparity of view. If you lived in NY City, or one of the crowded commuting suburbs, when you looked out the window, what would you see? That's easy, lots of other people. You wouldn't see farms or factories or even open space. But in our area, and for a great many other Americans, when they look out the window, they actually see those things. They see the very sources of their basic needs. I deliver to Pt, Judith, RI once a week. It's a half hour away. And when I get there I see a whole fleet of working fishing boats. There are several big farm stands along the way. There are a bunch of stands if I drive the other way too. While the fishing fleet is not a common sight for most Americans, working farmland is. If you live in NYC or Westchester County, your professional or economic life revolves around financial services. If you live in Greenville, upstate NY, it does not. So long as your local bank has access to capital it needs, you can continue to live locally quite well and without much sense of concern. There's that old joke about the Amish farmer who was asked what he though of the Great Depression. He said… "what depression"? That is in fact the huge debate. CNBC just had two guests on, one said the bailout plan was a mistake and failures were a necessary part of the cleansing process, the other said things will get a whole lot worse if we don't have it. Who is right? We are living a great experiment. One thing I know for sure. Those at greatest risk will no doubt see the bailout plan as critical and will proclaim that without it, the whole system is at risk. Those who do not see themselves at risk seem to be dead-set against a bailout, rightly asking, why should I pay for your reckless behavior. And so long as their local financial institutions can continue to function through the balance of the crisis, and their customer base retains confidence in them, why should they? Taking this idea to the highest possible level, is it a surprise that Hank Paulson, ex-head of one of the most prominent Wall Street firms sees the bailout as critical.

In the end, only one path will be taken, for better or worse. And like in any crisis, we will each have an opportunity to put our true character on display. Like 9/11, there will be some people who, at risk to themselves, will go back in to help a struggling colleague… or even a stranger. There will also be others who push down an old lady to get on the last subway car getting out. I'm sure there are people starting to hoard cash in this environment. There are also prominent people like Bill Gross who has already volunteered the services of PIMCO at no fee to help liquidate troubled assets should the bailout plan be enacted. He thinks he could make money in the process. What character are you displaying?

September 24, 2008             My Naiveté Shows Through

5:30AM New York time. Sorry no post on Monday. I had been tuna fishing offshore for the weekend and was still pretty beat up. Seas were rough for half the trip and I didn't get home until 9 at night on Sunday, having left the dock on 12AM Friday night, barely sleeping while on the boat. For 20 guys we boated 3 measly albacore tuna. This was our 9th annual trip with the same group of guys and while 9 years is no data set, it is still evident to me that catches have declined for in recent years. I talked about that with the mates and all they could say was that the fish get hit pretty hard when they come up the US east coast. It was another affirmation that the only way we're going to continue to have seafood if we look 50 years into the future is to be growing most of it. Meanwhile a simple ground fish like cod, which 15 years ago you could get on sale for $4.99 a pound (still up 100% from 15 years before that) is currently selling for $9.99 a pound.

I have to say sheepishly that the congressional testimony yesterday had me buffaloed. I listened to most of it and saw some on TV, and it seemed to a congressperson, it seemed as though they were against a Wall Street bailout. All manner of metaphor was used to describe the outrage from constituents at highly paid Wall Street types who made piles of money selling the very products that are now without a bid and about to hit the government balance sheet at taxpayer expense, while hard working average Americans who didn't take undue risk and didn't extend themselves are left to pick up the tab. It wasn't until I started talking to people that I understood what we were seeing was nothing but "political theater" as Dave Gilmore put it, and that a deal was already done, but which, Congress couldn't just rubber stamp without expressing their opposition before going home to their constituents and November elections. These guys are good. They can woo you with a tear in the eye while reaching around with the other hand to get into your pocket. Would the entire banking system have collapsed if a plan had not been reached? Certainly more major institutions would have gone down. But the future market for banking services (after the events of last year) got a whole lot smaller and a whole lot more conservative, easily serviceable by the many surviving institutions that never went near the instruments or the leverage that has become the bane of many. One has to ask whether it would be better to just get the whole thing over with in one fell swoop, and thus start the long road to eventual recovery sooner, rather than simply push out the day of reckoning and delay what may be inevitable anyway.

What I do know for sure is that I am very glad I am only loosely connected with that industry these days. And I am VERY glad I no longer live down in that NY City commuting radius. The real-economy repercussions from all this stuff, especially near the financial centers of the country, have yet to be felt yet. The last thing you want to be right now is an equity salesperson with no other skill set. Even if you still have a job, do you think the salaries and bonuses upon which your current lifestyle is based are going to stay where they have been? Do you think ANY of those salaries upon which ALL those Wall Street lifestyles have been based are going to stay where they are? Real estate values, property taxes, costs of services, have all gone up commensurate with compensation the entire way, and now the prospect for earnings, now and far into the future, have just been cut off at the knees. Forget the actual job loss. Just the drop in compensation will be recessionary. Yes… the Oracle of Omaha may have taken a stake in Goldman Sachs yesterday, and that may mean he thinks that financial market VALUATION has simply been pushed to a near-term extreme, but I don't think even Mr. Buffett has any illusions about the long road of life-style change that lies before us.

September 22, 2008             Back Tomorrow… Maybe Wednesday

6:30AM New York time. Feel like crap this morning. Will try to post tomorrow but definitely Wednesday.

September 19, 2008             Untradable

6:30AM New York time. Yesterday was quite the reversal in fortune for price action. Whether or not the market truly thinks an RTC type bailout or coordinated central bank interest rate cuts or regulatory restrictions on short selling will actually stem the tide of capital contraction remains to be seen. Perhaps yesterday was just a precautionary short covering rally of massive proportions. I remain on the sidelines. For me, these markets are untradable. Unless you're sitting in front of a screen every second, ready to act at a moments notice, you haven't got a chance. Or… more accurately… you've got a chance… its just that the chance is more of a flip of the coin rather than a calculated assessment of risk and reward. My MO is to put trades on, leave a stop in, the go out and try to produce a tangible good. In this market, you can be right and still get stopped out (with very wide tolerances by the way) intraday. I need things to settle out a whole lot more before I step back in. Plus, at this point, there is no much government intervention (verbal and actual) in the various markets, the validity of what might be an obvious technical signal is out the window.

Here's what I do know. We have entered a new era of government-managed markets. The ascendancy of financial innovation has come to a crashing halt. The plethora of over-the-counter derivative products will eventually be liquidated but the creation of new products is over for our lifetime. Banks and brokers will be back to an older traditional game… lending to bona fide borrowers from the pool of deposits and investing in the tangible. It will spell a workforce contraction in the financial industry for years. The only place where jobs will be added will be in clearing the books and liquidation of the lingering stock financial products of mass destruction that were behind the recent turmoil. You know what? In the long run, that will be a good thing.

For the United States… recent events have pushed the country into an even deeper debt hole, with financial industry tax revenues as a non-contributor for years to come. We have entered a whole new, protracted period of tepid economic growth. In aggregate, the nation is going to have to learn to do with a whole lot less. If this is the stove we had to touch… the painful leaning experience we had to go through to finally learn not to spend more than we make or produce… then so be it. The rest of the world that sells us products will have to shift down as well. The spike in US economic power is now behind us, and like any parabolic, long term cyclical bull market, when it ends… its OVER.

The truly painful adjustment process for the real has only just begun. The jobs lost at Bear and Lehman and AIG are gone, never to return. More will follow. Over the next few years, I suspect the number of MBAs looking to get into investment banking will dwindle to nothing. Again… when you really think about it, that's not such a bad thing and it was something that was destined to happen at some point anyway. Selling smoke with a yield is (or should I say was) certainly a finite end game. Perhaps now, the emphasis in education and vocation can slowly shift toward a more productive direction… like resolving our global food and energy supply problems. I only hope at this point that the adjustment process is not so painful for all that it drives countries and regimes to lash out at those they see as to blame. We are all to blame.

September 17, 2008         Entertaining The Unthinkable

6:30AM New York time. More big news from this morning. Analytical coverage continues pretty much around the clock. I am a converted believer. I year ago I thought the failure of a single big firm would signal culmination of the current cycle bottom. People like Dave Lewis and Dave Gilmore kept telling me the problem runs way deeper, that this was in fact a once-a-generation outlier event that would push out the normal cyclic low by a couple of standard deviations. Some of our parents (American parents anyway), lived through the Great Depression. That was THEIR event. This one is ours. How many firms are we looking at now? Bear, Countrywide, Lehman, Fannie/Freddie, and Merrill now AIG gets a bailout and Morgan Stanley is reported to be seeking a merger with a major money center bank. And sill, despite all the rescue packages and lifelines… the stock indices have not exactly put shorts on the defensive up to this point. I had lunch yesterday with someone very well connected in the hedge fund industry. The fund group she works for is doing quite well through all this. Yet her phone continues to ring off the hook with clients worried about where their funds are held and "are they safe?" What is the accurate answer to that? Yes… for now. The cascade of capital destruction continues to move from one firm to the next. Can anyone say we've finally reached the end? Technical price action would say no. The trend remains intact. Look at lending spreads between banks. New lows in stock prices and new highs is credit spreads made yesterday does not bode well. And only now is much of the public reaching a point of pain and fear where they are asking the question… should I sell? My sister asked me yesterday if she should put her money in the mattress. When people start worrying about the health and solvency of their local bank, that is really a sign that the whole system is in fact teetering on the brink. The worst of all scenarios would be a broader public panic that would squeeze the liquidity on Main Street and threaten the health of even the smallest, most conservative, local financial institution. Institutions, that when this all began, stayed as far away from the original causes of the problem as they could possibly get. A falling tide lowers all boats.

I have no idea where all this ends up or how bad things get. It is obvious that the entire landscape and way of life of Wall Street has been changed for the balance of our lifetime. And things are still not over. Events and news continue to break so fast, it has made me reluctant to take even the shortest duration leveraged trading position. I covered my S&P short on Monday and have done nothing since. The push-me-pull-me battle between the changing macro landscape and the P&L driven trading decisions all firms are making right now make trading the capital markets more like the flip of a coin than a thoughtful analysis of odds and outcomes. The only thing for sure is that none of this… at least as far out as we can see right now… is good. Even people who have warned of this for years have gotten hurt in one way or another. The most traditional store of value… gold is well off its highs and arguably in a bear phase. The US Dollar… which, should by all logic be taking it on the chin with all these events, has soared. Go figure. Perhaps it has topped now but who can say for sure… certainly not me.

In the longer term… for all those who have been saying that Wall Street will eventually get its comeuppance… well… here you go. If you railed against a bond salesman making 300K a year for doing nothing other than picking up a phone or typing an order into the box… well… here you go too. The problem as always will be the collateral damage. I'm about as far removed from a Wall Street sales desk as you can get, but I have no doubt I'm going to have to work harder the next year or two to sell the same volume of oysters. In the VERY long run, I am sure there will be many positives to come out of this for America. But for now, and for the foreseeable future, we still have a lot of pain to work through. The implications for government funding (local and federal) have not even begun to be felt yet. The sure way to trim excess government spending is simply to not have the money. That day is coming. It will be tough to see the good when your town has no money to plow the roads. Will Dave Lewis see people rioting in the streets as he did when he lived through the Asian Financial Crisis? I certainly hope not, but who knows? The very fact that I could entertain such a notion is incredible.

September 15, 2008             Watching History Get Made

6:30AM New York time. What can one say about a day like today. There is so much information flying around its hard to know where to begin or what to talk about. Plus, there are so many levels on which one could look at events; a discussion of just a few could take many pages as well. CNBC was fully staffed last night as they covered the opening of the foreign markets.

Among my list of preferred topics is that, unlike after Bear Stearns and Fannie and Freddie, Treasury and Fed officials are no longer willing to commit public funds directly to bail out another Wall Street firm. Yes… the Fed has made all kinds of borrowing and lending facilities available, but the public is no longer on the hook for all manner of financial instruments and mortgage derivatives that sit on Lehman's books. So it will be very instructive as to how the market digests all of this on its own, without a government net. Participants are in survival mode. There is no macro right now other than the P&L of one's firm. It is the complete reverse of the dot.com mania. There is very little calm, rational appraisal of asset valuation going on. Many firms are simply bailing on any assets that can be sold in an effort to raise cash and buttress themselves against redemptions and withdrawals. For those who STILL think the markets are NOT driven by speculation… I submit today's price action as a harsh reminder that underneath it all, we remain (as always) torn between the emotional extremes of fear and greed. Flight of capital destroyed Bear Stearns. Now it has destroyed Lehman. It has driven Merrill and BOA into a shotgun wedding, hoping to take Merrill off the table as the next target. What about AIG and WaMu… and after that?

The other thing I find fascinating in a larger sense, is that, while a great many people thought the equalization of the financial/hard asset seesaw would come about through a sharp increase in inflation… or even Weimar hyper-inflation (as some were saying for a while), it is actually coming about through a massive DEFLATION of existing financial assets. The spread between actual goods and goods producers and paper and paper originators is collapsing. Indeed valuation for goods and goods producers are now falling too… just a whole lot slower than financial assets and firms are falling. In the long run, I think that will be easier to recover from than if financial assets remained high, and hard assets narrowed the spread by increasing sharply. And some of that makes sense too. How did one justify paying and institutional salesperson several hundred k a year, for simply picking up the phone or typing an order into the Box, when comparatively speaking, the production of goods requires SO much more effort.

I remain short a handful of S&Ps, which, even at the small size, I find myself very thankful for. I was watching the news all weekend, as I'm sure if a deal had been struck to "rescue" Lehman, the Dow would have been opening 200 points higher. I also think Gilmore is on the right track that continued liquidation of positions is resulting in a bid for the dollar and continued selling pressure on metals and petroleum. I imagine there are still a few Ospraie Capitals out there who never envisioned the day where they would be FORCED to liquidate holdings just to survive (if they indeed do).

September 12, 2008             The Upside Of Tough Markets

6:30AM New York time. I personally have not been having much fun in these markets. Trading and positioning is as tough as I've ever seen it. One thing is for sure though. If you can survive them as a money manager, if you can pull gains out consistently despite the reversals, head-fakes, and head-spinning volatility, you will come out the other side among the few who managed to make good in a time that will see a record number of capital managers fail and close up shop. The few… the proud… the marginally successful… but at least you will STILL BE STANDING.

My biggest problem remains one of patience and discipline. OK… I got stopped out of my dollar short. I never had a chance to trade around it. That's fine, wrong quick and out. But the S&P short… that one I had right. But I still managed to negate a good trade. After Tuesday's big sell off, I covered half the position. The idea (as always lately) is to (from a trading standpoint) fade the excess short-term moves that are part and parcel to our hyper-volatile state. And in no market is that more relevant that in equities. My idea was to wait for a rally, then add back the original position plus an extra unit. Through all the volatility it still looks to me from the charts that we are eventually going to see new lows in the S&P.

On Wednesday the market put in a tepid attempt at a bounce. Already… I'm starting to get itchy about having covered and not having enough of the position on. Then Thursday, during the pre-open, prices are down 10 S&P points. Listening to the news you would think things are starting to unravel again. So what did I do? Naturally I put back on the original short. OK… that's fine. And certainly for half the day, that looked like a good idea. But in the final hour of trading we get rumors that Lehman has found a buyer and financials stage a sharp recovery. That's the kind of stuff I'm talking about. That kind of rumor and subsequent price action has been a hallmark for the past year. The S&P rallied to take back all the losses PLUS closed up 17 points or 1.5%! So here I am, with the extra unit, that I HAD taken a nice profit on, now back on and 27 points net in the hole… all within a couple of hours!! If you're not right on the money… and you're trading on a leveraged basis… you can have your fortunes reversed in the blink of an eye!

The point (which I keep trying to get across to myself) is that such behavior is now the norm, and that you (I) need to be in a position to take advantage of that kind of action and not be put in a bad position by it. The ONLY positive is that I've been trading small, so I actually planned (initially anyway) to end up with twice the size position than I currently do. You can say… why the hell are you concerned… you still have room to add. True, but that doesn't negate the BAD DISCIPLINE of not WAITING for the rally, and selling part of that position in the hole. These markets demand the utmost in PATIENCE, even at the risk of missing a move. Because the reality is… they continue to provide plenty of opportunity, rally and sell-off, to accommodate participants interested in either side of the market.

I can already see the next disciplinary hurdle I am going to have to get over. That hurdle is going to be the surge in short-term, crisis resolution optimism that will ensue (both in price action and the financial press) over the next couple of days and will probably create the next short term top and selling opportunity. It will require one to look all of the emotion (and price action) swing right in the eye and go the other way. That has been the nature of this market. To succeed and prosper you have to take that leap of faith and position against every knee-jerk piece of information that is being thrown at you in the moment. And if you can do that… then yours is the Earth and everything that's in it, and - which is more - you'll be a Man my son?

September 10, 2008             Where's My Bailout!

6:30AM New York time. I took another shot at a short Dollar position again yesterday. I also bit the bullet and got short S&P's after Friday's reversal and the big Monday rally on the Fanny/Freddie rally. I have abandoned my attempts to fade this thing. I fail to see how another government bailout of a "too big to fail" institution is either good for the equity markets OR the currency. And right behind Freddie and Fannie, the auto companies are lining up for funding too! So when the Dollar Index reversed to the downside, I took that as an exhaustion signal and jumped on it. I sold the S&Ps out of the box in the pre-opening while the market was still up for the morning. We'll wait and see how things end up on both these trades. A couple things continue to make me nervous. I think much of what we've seen for price action over the past few weeks are bad-position driven. And those positions include the short Dollar/long commodity trade. I think liquidation of those long-running trades is still going on. So the Dollar rally is less one about Dollar strength relative to other currencies and more about people being forced to liquidate long-profitable short Dollar positions. In equities, that phenomenon may work in favor of the short side. I heard yesterday that Ospraie still had large, illiquid equity positions that it had been unable to unwind. That's the kind of stuff I'm talking about. There is no level of value when people are FORCED to sell!

Regular readers know I have been fairly sanguine about the whole financial "restructuring" that has been going on for the past year. All the while both Dave Gilmore AND Dave Lewis (two opposite ends of the opinion poll, by the way), have been warning me that this is not just another cycle end that will experience the standard extreme and then revert back. BOTH have been saying we are in a once-a-generation major event that will get a lot worse and take a long time to heal before things will be in a position to improve. Maybe I was just in denial and didn't want to believe it. But finally… yesterday… after watching Lehman stock melt down… was the first time I really felt the "fear" in the pit of my stomach that things could really come apart.

My oil-trading friend and benefactor, Jim, recently saw the movie; I.O.U.S.A. He suggested I see it too. I have not yet but the gist is obvious. This movie was made before Fannie and Freddie. The final outcome of the Lehman situation and the auto companies remains unknown too. Perhaps by next week Lehman will be trading in its "securities of questionable value" to the Fed for dollars in order to continue operations. Still more junk debt will be hitting the Fed's balance sheets and receiving backing from the "full faith and credit" of the US government. I have to ask myself, and obviously many of you have ALREADY asked the question… if things are that bad now, that warren Buffet and others need to make a movie to highlight it… where are we going from here? I rarely make a move in my currency trading on a single fundamental factor without a compelling technical case of obvious price exhaustion. Yesterday I made an exception.

September 8, 2008                 Now What?

5:30AM New York time. Sorry I didn't post on Friday. I was in no mood. I went fishing. I've just about had it with these markets. This morning is no different. I've seen plenty of other tumultuous periods of market activity in my career, but I cannot remember one so dominated by the kind of market neurosis we are seeing now, manifested in extreme swings in price and excessive volatility. And we're at it yet again this morning. We have confirmation that both Fannie and Freddie will be placed under government conservatorship. Equities around the globe are up huge. The current explanation of perception is that this bailout will help stabilize the US housing market and buoy consumer confidence. Will that be the reality? Who knows? Basically… you're saying the government is now in charge so everything will be better. Has that ever generally been the case? I say all it really means is that we have now put the taxing power of the US government behind financing in the housing market. So citizens in good financial standing will be subsidizing those who have not been quite so prudent. Is that EVER a good idea? Still, one cannot argue that a huge rally has taken place on the news. Is that simply a massive short-covering rally, or do we have a bona-fide significant event that will change the underlying bias of the market. I will not attempt to predict that outcome. I say (yet again) we let price action make that determination. As of Friday morning, the S&P 500 was only 20 points from new lows. Now everything's all better? 1300 to 1320 remains the top end of the recent sideways range. Price will need to take that level out to start really exerting pain on shorts and under-invested participants.

What I do see as in favor of this option is the extremely negative sentiment skew that exists in equities right now. Late last week we got news of the closure of Dwight Anderson's (Ospraie Management) main hedge fund. While most of the losses in this fund appear to be commodity-based plays, such liquidations (in the past) have been coincident with capitulative bottoms in the market. Hedge funds have been dropping like flies. A washout in the capital management industry (while uncomfortable) is inevitable, necessary, and highly indicative to create and signal major directional turns. The cycle top got made on the joke that "doesn't everybody work for a hedge fund now?" So it's only natural that the cycle bottom gets made on the question… "Didn't you used to work at a hedge fund?"

Like the worse than expected Payrolls on Friday, the most important question… indeed the ONLY question… is whether or not participants (in net) will start putting money back into stocks rather than taking it out. My suspicion (from my recent trading experience) is that we are still in a broad process of deleveraging and credit contraction generally. I know for a fact that hedge fund lines of credit continue to be pulled in and back. And yet… I also know that it is during such times of crisis and around such significant events… that bottoms historically get made. And since the ramifications of this action are being debated by every pundit Wall Street currently employs, and since the current range of opinion runs everywhere from the view that this deal will not cost the public a cent to the view that it will cost billions, I think it is best for someone like myself, of limited topical expertise, to bow out of that debate. I simply say we watch where the significant highs and lows get made and make my future calls accordingly. One thing I do know… the behavior of participants on sharp stock rallies the past few weeks has been to lay all over them and use them as selling opportunities. Only the end of the day results will demonstrate if this will be a repeat. Gold is up and so is the dollar. I don't know what either of those two things mean. I have continued to take a contarian view of both these markets to my account detriment. Despite that, you will not see me getting Dollar-bullish at this stage of the game.

September 3, 2008             Good Call Dennis… You Win That One

5:30AM New York time. I always pay my debts and I always admit my bad calls. You were right on that one Dennis (Gartman). The Dollar was a buy on dips and it is turning out that the right trade in gold is the short side. While gold has not made a new low yet, it is hard to see from the price action and how fast it has taken back two weeks of gains, and from what the dollar and oil are doing, that it will not. What is ironic about the past couple of days is that, other than the long dollar trade, EVERYBODY loses. Stocks, which might normally benefit from a crack in oil prices and a stronger currency, put in what can only be described as ABYSMAL price action! What does it sat about the selling pressure when the market opens up sharply on very positive news, rallies for a couple hours, then retreats from all its gains to close on the lows. That is the exact opposite of what a bull market should do.

I stopped myself out of my gold trade yesterday morning. I ended up making a little money on the trade. That was offset by a brief flier I took on the long side of S&Ps thinking we had the potential for a sharp correction on the oil price drop. Not. So I'm back to flat and scratching my head for trade ideas. No… I STILL refuse to climb aboard the long dollar trade at this stage of the game.

At this point I'm going to sit back and keep an eye on things for a couple of days. My contrarian bent still has me wanting to generally fade a lot of what is going on out there but clearly there is still a lot of liquidative power out there, both in the broader equity market and the short-dollar-long-commodity trade. When that liquidation has largely run its course it will again become apparent in the price action and price reaction to news.

August 29, 2008                 Still Up In The Air

5:30AM New York time. I was hoping this week would be a little more decisive in regard to putting a hurt on gold shorts and Dollar longs… that... or a hurt on me. Instead, the Dollar is pretty much where it started the week. Gold has done a bit better in that it has at least been able to cling to the decent recovery levels we saw last Friday. But we're a long way from being out of the woods. Perhaps it's because of the summer holidays and I'm just expecting too much. We'll see. I need to get enough price action going so that the financial press begins to have a need to justify a return of the weak dollar trade. I need to see participants who have made hay on the long-dollar, short commodity trade start to get a hurtin' on their P&L. I need to see Dennis Gartman start to backpedal. There are some encouraging signs. Gold seems to hold up fairly well despite the dollar not making much threat to the downside. If gold can ever decouple from currencies entirely, and not simply be seen as a weak dollar surrogate, that would be a HUGE development. The dollar has also NOT been able to make (or I should say hold) new highs despite a weak of weak European data and surprisingly strong US GDP data.  Oil is a bit of a pain.  The $6 dollar swings in price don't help.

August 27, 2008                 And Now… Let's See Some Rally For Confirmation

5:30AM New York time. Even now, as I turn on CNBC for my first update of the day, the current guest is touting the Dollar to the upside. "I think Eurodollar will bounce to 1.50 before it trades off to 1.40". OK… maybe so. But I'll tell you what I see. I see the Dollar Index making a new high yesterday before settling mid-range, and today its lower. While it isn't an extreme example, I would still call that a failed new high. Failed new highs (adnauseam to some readers) are my favorite trade entry chart formation. And… on the psychological/news/commentary side, I find it amazing how many analysts and strategists have changed their tune on the Dollar in just the past month. Lehman now say's the Dollar will move higher through year-end.

Here's what else I know. While the Dollar was testing new lows yesterday, gold actually closed higher. Yes, it had a period of intraday weakness, but that gave way to a mildly positive close. So, after last week's rally, which saw 3 of 4 trading days higher, we got two mildly lower closes followed by a lower open with a higher close. Essentially… 2 days forward, 1 step back. In price terms, we got a $60 dollar rally off the lows followed by a $30 retracement off the highs. Is that not quintessential corrective action… in the up direction… with the market commentary increasingly bullish on the Dollar and bearish on the commodity trade? What does that sound like to you?

PS… the final nail in the coffin. Despite the plan I had going in yesterday to add to my gold position on weakness at some point, I lost my nerve at the peak of intraday selling and then refused to chase it as it rallied back. When I lose (once again… temporarily and still way too frequently) my nerve to look the fear and the pain of intermediate loss in the face, and act on a plan regardless of current price action… I become like 90% of all other participants out there. So… that would mean I am not alone in WANTING to be longer a trade but actually not.

Enough said.

August 25, 2008                 An Important Couple of Days

6:30AM New York time. Essentially… this looks like it's going to be a test week for the resumption of the Dollar rally trade. It's my view versus the Dennis Gartman view. He was a guest on CNBC's Fast Money on Friday where he reiterated his call that the Dollar has put in a meaningful bottom, is in the midst of a meaningful rally, and the tough trade (meaning the right trade), is actually to be short gold. One of Dennis' points was that the retracement last week off the Dollar highs didn't even get the Euro back to 1.50. If the Dollar has real selling interest, it would have at least bounced to 1.52-1.53. The fact that it didn't, demonstrates that there are still large numbers of corporate and passive money participants who are hedged short the dollar. And their desire to cover those positions will push the Dollar higher still. I can at least appreciate to pragmatic explanation. At least he didn't try to sell me some handpicked econ-mumbo-jumbo that would justify a long Dollar position. It IS about positions… it IS about capital flow.

So there really isn't a whole lot to say other than… let's see whose right. I myself am going to play this thing all the way through. That means I will probably be adding to my position later today, or, more likely, sometime tomorrow. We had four up-trading days off the lows. The market is entitled to (and should actually be expected to) a couple of days back the other way. The other side of the Dennis' argument for poor price performance is my argument; I think it will be telling if the Dollar is unable to go through her recent highs, instead… running out of gas on the upside. That will result in either a lower high for the Dollar Index, or a minor failed new high… both good technical behavioral signals I would choose to buy and play against from a risk standpoint. Gold has the advantage (so far), of still being quite a distance from the recent $788 lows. That ability to hold is also a double-edged sword. A failure of the Dollar and resumption higher would mean Gold has some catching up to do. It would probably get really crushed for a couple of days. A hold would mean gold has more underlying relative buying interest to it.

On the intermediate term… for the next quarter of so, I am still a bit uncertain as to the macro direction. The dollar has had a huge rally back, taking the commodities down too. For much of this year, I had thought the Dollar was way overdone on the downside. The recent rally has done much to correct that. Is it enough? Is the correction done? It certainly went a long distance price-wise, but really hasn't eaten up much time. I would feel a whole lot better if there were a lot more Dennis Gartman's on board, touting a bottom in the US currency. And while I feel pretty good about this trade below 1.50 Euro or $820 in Gold, I'm not sure how I would feel if the Dollar was to sell back off to 1.55 and Gold were to rally back to $900. Fundamentally… I'm not sure the resumption of the big secular bull market in commodities can resume while the pain of recent high prices in food and energy are still beating on demand and weakening the global economy. While the leading edge of commodity cost may have turned down, that lower cost has not worked through the pipeline, and most buyers of finished products are still paying high and rising prices for goods… and reacting accordingly. Ironically… I think the best thing for commodity prices would be a bottom and upturn in the US housing and stock markets.

Longer-longer term… the planet still has a demographic juggernaut to contend without any meaningful alternative to our current energy/food/potable water supply issues. The question, as always, between these three time frames is timing. And while I love to discuss them and throw ideas around with interested parties, the reality is; if I don't have it right/survive the very short term, I certainly won't be around for anything longer.

August 22, 2008                 Now What?

6:30AM New York time. The last couple of days were thoroughly enjoyable. I got lucky and everything just kind of worked out. There was a bit of a mad scramble to buy commodities as a decent number of participants started to question their decision to write off the anti-Dollar, long commodity trade, especially after a month of sharply corrective action. Goldman Sachs came out and reiterated their call for $150 crude. They also recommended the mining and oil stocks. There's nothing like getting the preeminent Wall Street institution to get their prop desks lined up in the direction of a trade and then come out and recommend it. How they get away with that is anybody's guess. I guess a legacy of providing Treasury Secretaries can cut you a lot of slack. I added to my initial gold position on weakness on Wednesday and watched the market end the day unchanged. That was very positive price action. Yesterday built on that and looked like a bit of a mini toss in the towel day. I actually sold a quarter of the position into that strength. Now I've got a few profits booked on the trade, my average price is well in the black and I have fresh dry power with which to reload and perhaps add just a little more size. My guess is I'm going to need all that as this thing is going to get a lot trickier from here out.

Now comes the true test. Will Dennis Gartman be right… and should one get long of the Dollar on dips? If so, the last couple of days certainly qualify. And if he IS right, then people like myself are going to be walking right into a mine-field… adding to their gold, oil and short dollar trades as those markets pull back. And IF Dennis is right, then price action is going to slice right through our bids on the ways to new lows (of highs in the case of the Dollar). For the record… there is a nagging feeling in the back of my mind that the oil correction is not over yet, and that it is possible we eventually test $100 by year-end. But over the short term though, $145 down to $113 in one month is a big move. I can easily see a bounce back to the $125-$130 area before we roll back over. For the record, I think oil can do all that without necessarily taking gold to new lows or the Dollar to new highs. That view is why I want to stay flexible, and take advantage of emotional moves either way in gold from here on out. I think I can still pull money from the long side regardless of what happens just by trading around a core.

Fundamentally, I myself am not as negative as many other long-term Dollar bears on the US economy or her fiscal prospects. But neither am I a flag waving Larry Kudlow either. I actually do buy the argument that while the US may be in a world of hurt right now… the rest of the world… particularly Europe… is no shining example of fiscal responsibility and economic strength. And Japan… hell… they've still got more problems than you can shake a stick at. I wish the markets weren't so fixated on the gold/Dollar relationship. It would be nice if gold could start functioning as the anti-currency rather than the anti-Dollar, as it is now. At the bottom of it all are oil prices. They are one of the huge pivot fundamentals around which much of all this global macro revolves. And since nothing has changed on the whole global demographics driven supply//demand/alternative-source picture, I've got to think we have not probed the ultimate high price that will finally encourage meaningful long-term change. By the way, I DO think that change will come out of the US. And THAT will ultimately create the long-term bottom in the Dollar. But I digress. Like the weather, while it is tempting to expound upon our future view of things, one must also realize that the farther out we look, the less likely out prognostication will be.

For now I'm just going to stick to trading around a long gold position as surrogate for both long oil and short Dollar trades. The volatility of gold falls right in between the hyper volatile oil market and the not so volatile Dollar Index. I'll be looking at the $820 area to reload on the gold. That equates to $117 in October Crude and 77.00 in the Dollar Index.

August 20, 2008                 Forecasting vs. Post Casting

6:30AM New York time. In the last two years, Dennis Gartman has gotten in increasing amount of airtime. He's on CNBC and Bloomberg Radio all the time. Dennis' timing was perfect. He was one of the last commodity guys left standing after 20-years of deflationary bear market. So as the bull market advanced, he was one of the few guys the press could easily go to for a credible explanation. It seems recently however, that a few of Dennis' major calls came pretty late in the game. He bailed on gold back in the spring, well after the big break. Same thing with oil. The other day I heard him on CNBC saying that "by all measures", the Dollar had broken out to the up side, and people should get long of the dollar on dips. No offense Dennis… but telling people the US currency is going higher after a month watching the Dollar Index trade straight up 500 points from .7150 to .7650 is not much of a stretch!

I say this only because I am always on the lookout for the next Liz Clayman. Remember her? She was the rather buxom air/redhead on CNBC who didn't know one end of a market from the other, but for a while there was one of the finest contrary indicators on crude oil I had ever seen! Whenever Liz got really excited that oil prices had come off (and that would be good for stocks), it was time to buy. On the upside, after oil had had a good run, she would lower her voice when talking about it, as if empathizing with all those poor stock investors who were being damaged by higher prices. That was a sure sign that things were overdone. I'm not ragging on Dennis Gartman. I have enjoyed more than a few reads of his work over the years. But guys like that (or FXA for that matter) HAVE to take a stand. They can't just say; "oh well… I missed it". They keep subscribers by having a view. And when markets start whipping participants around, it follows that forecasters (or post casters I should say) like Dennis will get whipped around too. During those periods of time, when somebody highly publicized like that, is out of synch with the markets, it's a great opportunity to trade against their pronouncements. Even if you're a dollar bull… is it really prudent to INITIATE a position in the Dollar Index after 500 points (7%) in only 20 trading days?

Perhaps… as Dennis says, the Dollar HAS broken out to the upside "by all measures". Then again, perhaps everybody and their uncle simply got caught the wrong way in that trade… during a very frugal time in the markets, when every percentage point of performance is important. And perhaps, also on that breakout, another batch of Toms, Dicks and Harry's, who have been calling for the Dollar to bottom, have gotten in? I've grown very skeptical of trend-line breakouts over the past few years. Anybody can draw a straight line on a chart. And since virtually all participants have access to the same pictures, breakouts, it seems to me, have simply become opportunities to suck another batch of players into a trade situation. Breakouts have in effect, become their own short-term exhaustion phenomenon.

If you want to impress me as a forecaster, start telling me about potential situations BEFORE they've run away 10%. I can't stress enough how much easier it is for me trading when I get in on a game at the early stages. Even if I am ultimately wrong, my risk is so much less. And more importantly, my points of decision are so much closer together. IF I WERE to buy the dollar here… where would I tell myself I was wrong? But if I SELL the dollar here, my point of decision on being wrong is only a stones throw (and not much account equity) away. Yet… there are signs even now, that the Dollar bounce is running into more significant resistance. Observe (or think back on) the price behavior from yesterday. PPI was much stronger than expected and the dollar started off higher. It was probably the third time in a couple of days where that Dollar tried to extend gains on an intraday basis but failed. They tried to whack energy too but that also bounced back. If you watch CNBC, you can't help but notice that they have stopped having oil-bulls as guests. Instead… it's all about "when we get to $100". The news is now saturated with global slowdown and reduced demand for commodities. I simply try to put those two observations together. So let's see… we have price action that's become increasingly sticky on a higher Dollar and lower commodities. At the same time, financial news content has finally come all the way around toward validation of that "new" view. I say conditions are ripe for things to come back around again… at least for a time. Then we'll see how that change evolves with price and news. My point is only that we have potential for another swing. Nostradamus I ain't! But when the warning signs flash, I get paid to take risk. Lets try to do some forecasting rather than post-casting.

For the record, the first trade in my account is long gold purchased on Monday morning.

August 18, 2008                 By The Time You Read This

6:00AM New York time. Today is one of those days where it would be very easy to talk about a trade but then, for reasons of non-certainty, just not get around to executing it. We've been watching a HUGE counter-trend rally in the anti-Dollar trade. Oil has been coming off hard. Weakening economic prospects for Europe and a global softening are all over the news. Dennis Gartman now thinks the Dollar is a buy on dips. On the political front, Russia's incursion into Georgia has interjected tremendous uncertainty into the European security situation. Oil prices have slid 22% from their highs in a month, as demand destruction is believed to be in full force. All this is ALREADY in prices. So while all looks done for Dollar bears and commodity bulls… I say today could be a good time to have a look at that trade. We have all the ingredients for a serious test today. The Russia/Georgia thing seems to be in process of diffusion. At least the worst appears to be over. And we have a hurricane with a questionable path playing in the Caribbean south of Cuba. In addition, we have the financial news saturated with commentary about the deflating of the commodity bubble.

As always… debating the "fundamentals" is pointless. WHAT FUNDAMENTALS??!! If you're going to tell me huge changes have occurred in the global supply/demand balances of half a dozen major commodities and a radical shift has occurred in the relative fiscal and economic outlooks of the major G-7 countries, all within the last month… then I'm going to call the guys in the white coats for you. What I will say… is that there has been a major, P&L driven, correction in capital market prices that has gone a huge length to correct the seriously lop-sided position skew that had me wanting to buy dollars and sell commodities since January.

No one can foresee the future. I cannot say that this current correction is anything truly meaningful in terms of trend change. I cannot even say with surety if it has run its course form a corrective standpoint. What I will say for the umpteenth time is that trading/investing is all about odds. It is about risk and reward. It is generally and always about buying things when NO ONE wants them and selling them when EVERYBODY wants them. To that end… its not so much the trade concept… rather… it's the point that we have a handful of news items breaking (Georgia, Faye, Pakistan, Lehman), which may or may not have a significant impact (we don't know if they will yet), and none of these markets has had much of a chance to react yet… nor have they moved very far away form their recent lows (or highs, of you're talking about the Dollar). AND… as always… it's frequently not the news itself that's important… its how the markets interpret the news that's important. Tropical storm Faye has very little projected chance of doing any damage to Gulf oil facilities, certainly no more than the last little blow… Eduard… that came ashore in Brownsville/Galveston a couple of weeks ago. Yet Faye is getting a lot more hype than Eduard ever did. So it's not about the storm. It's about how participants are positioned this time versus last. And it's the same for every other fundamental out there. I could lose every penny in my account, even on low leverage, waiting for real fundamental change to occur in the global economy. And by then… the capital markets would be looking out in the future for something entirely different anyway. This game… my game anyway… the leveraged game… is about trading human emotion and over-reaction to events and data.

I have not actually put a trade on in my new account yet. So hopefully… by the time you read this, I will be the proud owner of a moderate sized gold position with the idea that the recent lows from last week will hold, and we are in for a decent bounce. I will probably leave the Dollar Index on the short side alone for a little while.

August 15, 2008                 Waiting For The Other Direction Now

6:00AM New York time. I was quite frustrated during the wait for my account to get opened again… watching trades I wanted to get involved with slide by. Now that I finally have the account open… those same trades do not seem to have run their course yet… keeping me on the sidelines even longer. It is truly instructive how quickly capital markets can discount an event or effect, and effectively price a plodding fundamental into price over the course of just a couple of weeks. The Dollar Index posted another big gain overnight and gold is now below $800. I would expect oil to have yet another break lower today in delayed response. The Russia/Georgia situation has added an important overlying fundamental toward increased European insecurity and basically helped validate the entire Dollar correction we have seen. Ahhh… reflexivity. I am seeing participants of the short dollar/long commodity trade get tortured by price action. All the ingredients for a contrarian opportunity are there… I just need some kind of technical/exhaustive behavior signal in price to get me to pull the trigger.

It's all kind of funny actually. I was forced by situation to wait for full maturity of the anti-dollar trade… to the point where it had finally washed itself out. Now… the completely opposite trade is in process of running toward full maturity but forcing me through conscious decision this time to be patient and wait for a similar washout. I truly wish there was a way to find out how much of this move is getting to be ETF liquidation from longer-term investors. In the meantime… I have to admit I don't have much new to say. My powder is totally dry and just as a great opportunity came out of the anti-dollar trade from being overdone on the downside… so too will a great opportunity come out of this current counter-trend reaction to that move.

As far as any meaningful change in the fundamental backdrop goes. There does seem to be quite a bit of consternation over the whole Russia/Georgia thing. And inflammatory comments from Russian officials are only helping to fan those worries. From the WSJ: Russian Foreign Minister Sergei Lavrov said the world "can forget about any talk about Georgia's territorial integrity," referring to the contested regions of South Ossetia and Abkhazia. Personally… I refuse to get all worked up about these sorts of things. As in so much of politics, I see much of this as aggressive posturing; the goal of which is to set the stage for what will ultimately be conciliatory action and compromise. Its interesting to me how many of my fellow Americans are aghast at Russia invading Georgia… a country right next door with multiple thorny issues of ethnicity and alliance… as other parts of the Balkans, yet those same Americans are seemingly oblivious to the rest of the world being aghast when we invade Iraq… a country on the other side of the world, which has had established borders and an established (albeit not to our liking) government for much longer. As always… your view frequently depends on which side of the fence you're looking in from. The progress to date of the former Soviet Union and her ex-republics toward greater civil and economic freedoms in what has been a relatively (comparatively speaking) short time has been astounding to me. The fact that some of those gains might be retraced in intermittent counter-trend actions does not surprise me. Nothing is more like markets than politics. It's another complex, dynamic natural system comprising billions of individual parts on a global basis. Politics too, tends to oscillate between wide ranging extremes and always revert to mean.

August 13, 2008                 My Last Post To CTOysters

5:00AM New York time. In yet another little twist of technology I lost my domain name CTOysters.com. I do my web hosting through GoDaddy.com. Unknown to me, they had been sending domain and hosting renewal notices to an email account I have never used. Their automated system was unable to recognize that I had an actively updated site and frequently used email account, and that perhaps lack of response to those notices was due to a problem and not intentional. As such, they never tried to contact me via alternative means to alert me to the problem. Once again… I guess you get what you pay for. Anyway… the domain went past the grace period and then back to domain registration where some vulture-marketing firm bought it. Now they want to sell it back to me for 365 bucks! Needless to say, at this point the whole become a matter of principle. Anyway… after today you'll have to go to CT-Oysters.com to read my commentary.

I suppose the whole thing is apropos to what's been going on in my account and for that matter… with the markets. Things have truly come 180 degrees about. I've gone from being a side-lined (no account to trade) dollar-bull, thinking things were way overdone on the downside… to being a cautious dollar bear after one of the sharpest counter-trend rallies we've seen in the dollar in years. More to the point than the dollar actually… is gold. One of the big catalysts to the rally in the dollar (aside from massive short covering for P&L reasons) is the idea that the rest of the world, has begun to and is increasingly going to get dragged down economically by the US. And with the Europeans leading the charge on standing firm on inflation… they have actually let their economies get more vulnerable than otherwise because of tighter monetary policy. While fiat money detractors should applaud this policy stance, it also tends to not be such a good thing for gold prices. Ultimately however, even the most stalwart inflation fighter will cave as politics and populism wins out, and forces the ECB to react more to economic conditions than conditions on the inflationary front. I think the sharp dollar rally was the first hint from the markets that the cave-in is coming. So (and Dave Lewis and I have talked about this at length)… if you don't really want to own ANY currency… what should you own? Answer: hard assets. And so the contrarian in me, having seen gold come off $220 from its highs (or roughly 20% of its value), back down to levels where it started 2008, and having turned a great deal of market opinion around from "get into commodities" to… "get out of commodities"… that now might be a good time to start looking to get back in.

The one big unknown for me will be the behavior of the public and what it wants to do with all that slower-moving ETF money that was being plowed into the commodities over the past few years. Its one thing to try and keep tabs on leveraged speculators who can flip their positions in a couple of days and whose activity shows up on CFTC reports and through put-call ratios. It's entirely another trying to figure out when John Q. Public has had enough of watching episodes of; the Lord gives… the Lord takes away. I guess, like anything else in trading, we'll use the technicals as guidance and make sure we keep our money management sound. My account had money wired in yesterday so that should be credited within a day or two. What are the odds that after all this time of waiting, that I would be moving my entire web contents and starting up my account again… two entirely unrelated matters… on exactly the same day. What does THAT portend?

August 11, 2008                 Full Development

6:00 AM New York time. As I watched the rest of the day's market action on Friday I couldn't help thinking about market timing. In a constant search for self-improvement, both in trading, and in everyday life, one of the personal shortcomings that repeatedly gets in my way and I have to own, is the tendency to be early (hasty). Regular readers have heard this a zillion times before. And as my oil-trading friend Jim is fond of saying… "I only make one or two mistakes when I'm trading… I just make them over and over and over again". Being early has nothing to do with a market view. And it's nothing to be ashamed of. Frequently our greatest strength is also our greatest weakness. And… in trading, sometimes it can come down to the price action of a single day. Further… to be honest… missing a significant top or bottom by a single day is nothing to be ashamed of. So lets change the definition of the problem. The problem is not being early. The problem is not letting the market come to "full development" before calling an end to it. Full development has nothing to do with fundamentals. Full development has everything to do with P&L. Full development is manifested by complete participant frustration and a near term surrender of position regardless of current market condition. It is the capitulative relief of growing P&L pain. It is about people throwing in the towel.

If you look at Friday's commentary out of the financial news, it was a 180-degree swing from the desperation in stocks and the dollar from mid-July. It was a 180-degree swing in market behavior in Crude Oil and Gold from essentially the same time. My point is… we are participants in a system (financial anyway) that has a repetitive tendency to operate between the two full development extremes. And time frame has nothing to do with it. Full development in a corrective phase may last only one week whereas the full development of the opposite major trend may have taken months to get there. The point is… full development is characterized by participants making decisions on extreme P&L duress. And the general rule I think one can follow is anytime a large number of participants (in anything) make a decision under duress, odds are high that it is going to be the wrong decision. And in the case of financial markets… an opportunity to take profits or go the other way. The second major point (on a more personal note) is to understand that full development is a natural and repetitive human phenomenon… so waiting for its occurrence before initiating position rebalancing is a sound strategy.

Whether or not Friday's price action changed anything for you in the economic macro is a personal decision. The point I am simply trying to make is that a day like Friday is one of the few critical pivot points that markets see every year amid hundreds of non-critical days, that provide a rare opportunity to take advantage of fellow participants when they are not thinking with their heads, but with their wallets.

My account is now open. So the next decision I will be making is; do I take this opportunity to get back on the negative Dollar trade and all of its associated markets. That would be long gold, long crude and short stocks. Or do I take Friday as something of more counter-trend significance and start trading these markets from the other side; long the Dollar, short gold, short oil and long stocks? Regular readers know the degree of heartburn I have had in recent months with getting too bearish on the US economy and financial system. We have already seen quite a lot of real-money capital flow in the US direction to take advantage of the previously very cheap currency. And we do have to ask the question if in an intermediate term sense if we've come to full development on the corrective side of the long-term trends. My hunch is that Friday's corrective rally was too easy. I still think there is a great deal of fairly passive capital tied up in short-dollar, long commodity, out of equity trades. I think the full exiting of those positions could take the balance of the year to come to fruition… especially in stocks. Even if the dollar and commodities have largely done their thing, if we get passive equity managers starting to chase stocks higher to keep up with their benchmarks for the balance of the year, the effect could be significant. Wednesday will probably be D-day for decisions.

August 8, 2008                 Surprise Surprise

6:00 AM New York time. Whew… on Wednesday I suggested that the Dollar rally was up at the high end of its recent range and as it hadn't made a new high (broken out), that Dollar bears should take the opportunity to put on shorts and Dollar bulls should trim down exposure to minimum. Sorry about that. Yesterday started out with a weaker greenback and higher gold but the trade faded through the day and the Dollar end up having a pretty good day. This morning it is soaring! We're a stones throw from being back down through 1.50 Euro. While I still would not have any inclination to chase prices here, it is important to note that the US Dollar Index has now put in a SIGNIFICANT new high! Whatever you or I think about the prospects for the US economy, her consumers, or her fiscal situation… understand that tremendous pain is building among those who have been betting on a lower Dollar and all the associated trades. A turn of passive managed capital back to the US could generate a protracted rally in all things Dollar and out of all things anti-Dollar. And while there is still some significant overhead resistance at the 76 level in the US currency, the implications of the price action we have seen is that we are setting up a far higher likelihood that participants are there to buy the Buck on pull backs rather than selling it on rallies. As of yesterday, we have entered new territory and greatly increased the likelihood that a rally in the US Dollar can last through year-end. The buying power of this capital flow is evidenced by the fact that it charged in regardless of the fact the ECB and BOE left rates unchanged. When a market's price action stands significant news on its head… beware. Just last week we watched the NYMEX energy contracts completely ignore a tropical storm in the US Gulf. Do you think the market would have behaved that way two months ago when it was in full bull mode? Not a chance.

So anyway… back to the dollar. As I said, the implications of Dollar strength are even greater in the associated trades. Gold and Oil, that may look like buying opportunities to some, should be viewed now with extra caution. Remember… as relentless as institutional and ETF money was going into commodities over the past 5years… it will be twice as violent during periods where is wants to exit those markets. And its worth repeating… yesterday was very possibly a stop and reverse day (at least mentally) for a high percentage of participants… as it would have been for me.

The market where we still have not seen significant reaction is US equities. Yet, I think ultimately, they could benefit most over the intermediate term from a perceived turn in the Dollar. In addition to weaker food and fuel prices boosting consumer sentiment, you have a world of passively managed capital that has gotten increasingly risk averse since last summer as the credit/mortgage crisis built. Now one leg of that negative duo appears to be falling away. From there it will not be a huge stretch to further the perception that the worst for the housing market is behind us too. Plus… there is still a huge analytical contingent out there saying it is far too early to get back into stocks. I say we have the makings for an explosive year-end rally (fools rally in the end perhaps) should managers be dragged back in kicking and screaming in order to stay with their benchmarks. Indeed… long stocks after yesterday's sell off seems to me to be one of the lowest risk/highest reward trades out there right now.

August 5, 2008                     Finally Back Up

5:00 AM New York time. I had some unexpected computer issues arise last Thursday on relatively short notice. I brought my machine in for service thinking I was going to possibly have it back for the weekend. Needless to say… I picked it up yesterday afternoon. Sorry for not giving much notice but I had very little myself. Hey… you get what you pay for right… I've been following the markets less closely lately as things have been crazy in Oysterland AND… after still more weeks of promises that all the paperwork and bullsh&% is done… I still am not trading an account. But things on the water are starting to work themselves through and I truly do believe I'll be back up and trading again soon. The baby oysters had a bit of a rough time for the past month. We had a stagnant heat wave with very little wind for about ten-days just prior to my going on vacation. That came right around the time the oysters were spawning. We also had half-a-dozen days with really low tides. The combination of factors pushed water temps in the nursery up to almost 90 degrees for over a week. The larger juveniles can handle that but not the real small stuff. So despite all efforts this year to make improvements on juvenile survivability through use of more gear and reduced densities… when it comes right down to it… if Mother Nature decides to turn unfriendly, there isn't much you're going to do about it. We'll see how bad things really are when I start adding up the numbers.

As far as the markets go… things have come a bit full circle. From over done stocks and the Dollar to the downside… we have recovered somewhat… making those trades far less attractive to me today. Oil and gold have fallen of their own weight… driven very little by a recovery in the US currency. Taking a completely fresh look at the charts this morning, I see the Sep Dollar Index is bumping right up against a number of prior highs in the top end of what has been a very extended and so far, durable trading range. Unless you think it is going to blow right through and break out to the upside (which I don't), you're far better off staying away and waiting for a decent retracement. Dollar bears should be all over these levels from the short side. Having said that, it also follows that gold is setting up for a substantial bounce. After yesterday, October NYMEX gold has three major ascending lows at $856 back in May, $864 back in June, and now $868 from yesterday. You can draw a perfect line across all three points. Again… unless you think the market is totally going to break to the downside, you have to be a buyer here for a trade.

Oil will play no small role in both of these trades but even so… the risk reward at such key technical points is well worth the risk even if oil continues to fall… putting pressure on gold and buoying the Dollar. As for stocks… a look at that chart puts yesterday's big rally in perspective. For now… it's just another sharp, one-day up move, that unless it's built upon in subsequent days, will break no new technical or behavioral ground. September S&P futures remain below 1300 and… each bounce top since the mid-July lows has been successively lower. So… in true short-term term contrarian fashion… the trades I was looking at three weeks ago I am now looking to go the other way on. As far as my intermediate-term macro bias… I still get the feeling the intermediate-term tide is turning. That is… the dollar is cheap… and with the rest of the world following us, and rolling over economically, it will once again leave the US to innovate a way out of recession. I can still see a rally in both the Dollar and stocks take us through year-end. I am far less confident on the macro though than I am on the view that these markets are going to take a long time to work themselves out, and in the meanwhile proved some pretty decent short-term trading opportunities. A big determinant for the Dollar will be where the upcoming downside failure stops. If the DXY puts in a higher significant low I will have a lot more confidence that we can see a tradable rally into year. How will we know? We won't. You just have to pick a decent retracement level with corresponding momentum loss and take the plunge.

Really longer term… the harsh reality is that we have not adjusted very much to the planetary demographic shift toward improved living standards. Demand destruction has been marginal and only an intermediate term economic contraction has saved us from an escalating commodity price spiral higher. The ingredients for that spiral remain in place. Eventually… the world will emerge from slowdown and once again people will want to provide more food and better services to their families. Yet we have had no major breakthroughs in alternate energy production or in food production technologies. If anything… industrialization in the developing world continues to pressure the environment and reduce the supply of arable land.

July 30, 2008                 Oysters Chores This Morning

6:00 AM New York time. Starting oyster chores very early today. Besides… since my opinion has been all over the map lately, its probably just best to wait until I have some positions on so my opinion has a little more weight. We're supposed to wire funds into the account in the next day or two. So… back on Friday.

July 28, 2008                 Few Vacation Insights

6:00 AM New York time. Well… back from vacation. I have to admit I did not follow the markets all that closely while I was away. For the first time is some years I didn't even bring my laptop. There was a machine there so I did check the charts and news from time to time. It actually provided and interesting perspective looking strictly at the pictures without the corresponding commentary from the heads on CNBC. I was a bit surprised there wasn't a greater reaction from the equity markets and even the dollar to the weeklong break in oil. Oil indeed looks like it just broke down of its own weight. It was not catalyzed by a move higher in the dollar as I for so long thought it might be. The fact that neither stocks of the dollar did much on that weakness probably does not say much for their underlying appeal to capital market participants right now. Adding all this together says to me that all these contra trend reactions will probably do more to attract fresh trend-direction interest than in initiating a new, contrary-direction trend. Whatever. Two weeks ago I was told my account would be ready in a couple of days. The saga continues.

Not a whole lot of anecdotal information gleaned on the trip either. There did seem to be a few more previously-owned big powerboats for sale than I recall as normal, but Saturday was also one of the busiest boating days I can remember in our previous trips up there. Perhaps that was more a function of the fact that it rained from the Saturday we got there through the following Friday. So cabin fever had set in and the first good day to be on the water everybody headed out. Who knows? I've come to think gauging the economy from the activity in a prime domestic US regional tourist destination isn't such a good thing anyway. You're always going to have a skew to the upside.

Here's what I do know… and its not a thing I often talk about amid all the bigger "philosophical" issues of being an oyster farmer… producing a high quality, high value, locally grown, environmental beneficial product using sustainable methodologies. And that's the fact that while most of the people who I met on vacation will be dreading going back to work, especially after 6 days of rain. I will be heading back out into the estuary on the boat to tend my crop in one of the prettiest summer settings I can imagine. Quality of life is a big factor too.

July 18, 2008                 Finally…A Level To Play Off Of

6:00 AM New York time. Oil has had a bad couple of days. Does it move mean anything? I mean… is the recent technical break enough to turn psychology around enough to start a reversal from net capital flow in, to net capital flow out? I knew I would never catch the first break in oil. The only way I am going to get an opportunity is on the retest. And to tell you the truth, that's kind of my gig anyway. I let myself go back and forth between market views so long as there is no technical action to indicate that something has changed. But once that action occurs and raises the possibility that a change has occurred… then I need to start making real choices beyond just weighing both sides. We've had a technical break, the significance of which is still up for debate, but at least it isolates the recent highs and gives trader/investors some concrete level in which to play off of and use as a line in the sand. So if nearby WTI were to trade back up to the low 140's, that actually might be a spot to look for a loss of corrective momentum and go after. We'll see. It should be pretty obvious from the last few days too how important lower oil is for equities. What I find interesting too is that oil has broken of its own weight… without any nudges from a firmer dollar. Gold has pretty much gone up while oil has gone down. I think there are actually some players of significant size out there playing the long gold/short oil trade. Still no real-time trading going on and I've got a lot of stuff to do this morning so I'm going to sign off. See you in 10 days.

July 16, 2008                 Nothing Toppish About It

6:00 AM New York time. The casino/carnival continues. And yesterday we got to ride the roller coaster again. While CNBC might have been optimistic about the intraday reversal in stocks, I saw the close as nothing more than action confirming trend. Exhaustion technical action starts the process of putting trend followers in a position of P&L discomfort. Unless it starts to reverse their fortune, it has changed nothing. One of the CNBC commentators yesterday made the point of saying the market "wasn't down that much"… so maybe it wasn't so bad. Guess what? The worst kind of action for any market is not the large single-day move, it's the relentless piling up of modest trend-direction days. That is the kind of action that indicates a steady, calm capital flow in or out. So while the intraday reversals were good for a thrill, they changed nothing. Markets that back and fill themselves continually work off excess position skew, extending the life of the trend and helping sustain it.

As I look objectively at the Dollar Index chart this morning, I can't help but describe the extended mid-March to mid-July sideways price action as nothing more than a consolidation that we are only now dropping out the downside of. That would equate to the same thing in gold, with the exception that the gold correction was deeper, and gold has NOT made a new high. But it would also suggest that a new high is in the offing eventually. The S&P 500 futures chart looks equally abysmal with nothing in the technical picture to indicate anything close to a blow off to the downside or exhaustion bottom. That leaves crude oil… arguably a major catalyst and driver of the other markets. Sure we've had some violent price action that many are pointing to as "toppish". But I think what we have setting up there is more of a situation where "fast money" accounts are reducing length and looking for an opportunity to profit from the short side. The problem is; real money, passive accounts of much larger mass continue to put money into the market. So the net flow remains positive and if anything, fast money types are quick to cover shorts, generating regular short covering rallies that in this case have and will, keep popping the market to new highs. I have noticed a growing chorus of bearish analytical calls. Without gratification, these calls simply indicate a larger participant base fighting the existing trend… not a bearish situation. To top it all off, I would have thought that significant demand destruction was taking place in the real economy. But a conversation with my oil-trading friend Jim revealed his view that in fact, gasoline demand was only off a couple hundred thousand barrels a day (essentially nothing) while distillate demand was not off at all. So I guess bitching about price does not equate to actually cutting back usage. Most commodity market participants will tell you that prices move higher until they discover the price that rations demand.

The net result of all this is that my contrarian inclination will continue to stay on hold. And while I may not be willing to commit my capital to the continuation of the trend, I also have no desire to step in front of a speeding train. And I must continue to bow to the gold-bug contingent… whose dire prognostications continue to be far more right than wrong.

July 14, 2008                     Surreal Markets

6:00 AM New York time. One of the scariest things about the major markets these days is what I see as their increasingly casino-like nature. As I watched the intraday swings last week, and observed the corresponding swings in sentiment, it is hard to believe that capital market participants are actually trying to determine an appropriate valuation for things in the REAL economy… such as the prospects for home prices and the value of a future stream of mortgage interest and principle payments from all US homeowners. The national mortgage default rate, according to the Mortgage Bankers Association, for the first three months of 2008 was 6.35%, up from 5.82% from Q4. This counts all mortgages that are 30-days or more in arrears. 6.35% is the highest since 1979 and the historical range over that period runs from the high fives on the upside, to the high threes on the downside. I personally think the biggest thing that pushed this figure to a new record was the explosion of irrational sub prime lending during the housing boom. I read somewhere that 90% of all foreclosures were coming from 4 states, more evidence that is a relatively narrow group of shaky buyers in a couple of highly speculative states that are accounting for most of the "outsized" nature of the problem. Without that, the default rate would simply be hanging around the historical highs, which is probably not unusual given the cyclical downturn in the economy plus having just come off a cyclical boom in home prices. The corresponding 52-week range for Fannie Mae is $70.57 to $6.68. Obviously… the lows were printed last week. Perhaps capital market participants are simply pricing in the real economy getting much worse, driving these default rates significantly higher still, as a number of my readers have been saying for some time. But, I would play devil's advocate by saying that, when you're talking about people paying their mortgage, the obligation to maintain good credit for the vast majority of Americans is one of basic self-interest. Most people will do anything they can to stay even with their payments. Unless one is forecasting a major jump in job losses and decline in employment levels for an extended period, I have trouble believing this rate will go significantly higher. If anything… we are sitting right now in the peak period for variable rate mortgage resets… so a decent argument can be made that default rates with see a similar timeline peak. And if you tell me that even a 7% default rate is enough to take the whole system down, then I will pay you your bearish due, and chalk it up to a colossal case of capital reserve mismanagement. As I see it, 7% is not so far outside the historical norm that it should have caused a systemic failure. To me the failure is one of confidence and capital flight. That is not something that is easy to predict. And… capital flows can also reverse and come flooding right back in. They are fickle and they are ultimately driven by fear and greed.

So as I add all that stuff up in my head… I have a hard time buying the argument that the REAL problem is as bad or is going to get as bad as many seem to think. 94% of all Americans are staying current with their mortgage payments. Which brings me back to capital flows and the casino as the primary culprit behind current asset pricing. And why should I be surprised? If anything, it seems we have had more frequent boom/bust asset market cycles in the last twenty years that we have had in the 50 prior years. Since 2000 alone we have had three major national markets; technology stocks, housing prices, and now oil, that have posted annual gains in excess of 30% during their peak appreciation periods. No offense… but such gains push the bounds of historical norm and beg an eventual counter-reaction. I personally will lay much of the blame at the feet of technology and our species inability to and slowness in adjusting to it. In addition, we have had an explosion in global prosperity over the same time period, greatly increasing the global pool of capital that now has (through technology) instantaneous ability to move from global center to global center… from asset class to asset class. The question is critical in determining the true severity of the problem and corresponding investment strategy. And what I keep coming back to is a reaffirmation that much of the volatility we are experiencing is less about the underlying conditions than it is about our excessive REACTION to the underlying conditions. We have… in effect… created our own hell. The casino that was paying off so well has turned decidedly unfriendly. So do I take it all seriously and panic with the masses… looking for even greater losses in the dollar and stocks… gold and oil at new highs… and play that. Or… do I continue along the contrarian path, looking for some significant exhaustion bottom in both sentiment and prices. Right now I am sitting on my hands. But very soon I'll have to make a call. It is a HUGE question and a HUGE decision. I wish the whole Iran/Israel thing were not part of the mix. THAT is a huge fundamental unknown. All of it demands that more than ever… that I keep my head while all those about us are losing theirs.

July 11, 2008             My Trading Account Is Almost Back

5:00 AM New York time. I finally got a call yesterday that my trading account should finally be all set up within the next day or two. Then we can wire in funds and start putting positions on. Yeah… like… three… two… one… OK… start trading!! Like there's a race to get back involved and I'm gonna rush right out and put a bunch of positions on. Sure. The reality is, I'm going to continue to be cautious. But… I DO need to think and focus more on the future than the past. Whatever has happened so far in 2008 has no relevance other than historic perspective. All that matters is what I think is going to continue to happen going forward. If that means the dollar and stocks are still a good short here then so be it… same for gold and oil on the long side. Everything that has happened in terms of news, data and market price is already discounted as on this moment in time. The only question is… how much more is left? Plenty of people I respect are saying a lot is still left, that this is one of those once is a generation kind of economic shocks that push extremes well outside of their normal standard deviation barriers. And that reversion to mean will eventually take place but from a much lower low. Perhaps that will be so. Perhaps not. So this weekend will probably a big one for setting up a trading plan going forward. And today will also be a good day to just kind of watch and see where markets prices close things out. While some of the commodities had a very tough week and oil bulls had a scare, that break in oil at least is looking like yet another buying opportunity. That's about all I'm going to say today. I want to enjoy my first morning of rest in some time out on my deck with a cup of coffee. I've been working long and hard keeping up with my little oysters and for the first time ever they are now sitting in the nursery… all 800,000 completely graded out to the same sizes, every bag clean and evenly stocked. It took a day and a half, which is about 16 hours in my world, but it has earned me a big sigh and a chance to sit back, if just for a short while.

You know… its funny… but I realize that without the account… this column has felt like it has less relevance… and certainly less enthusiasm. There's nothing like putting fingers to keys when you're defending a trading decision or position… when you're more than just a casual observer. Not having risk on not only reduces relevance and credibility, but there's also less personal connection to the markets and what's going on. You simply don't get as excited about things as when you're involved. I have to thank all you guys (and gals… if any) for hanging in there during what has been a frustrating transition period. There really hasn't been a whole lot to read in this column over the past few months. Hey… and I guess… what can you expect when you're really just peering in on some guy's personal market ramblings. Talk to ya Monday. Have a nice weekend.

July 9, 2008                     Seeing Capitulation In Myself?

5:00 AM New York time. I've been going back and forth the past month between ideas like the topping of oil and the bottoming of the dollar and the desperation of giving up on the topping of oil and the bottoming of the dollar. The internal debate is instructive and critical. A topping of oil and/or a bottoming of the dollar would have broad implications for the other capital markets. If indeed my emotions are no different from that of other trader/investors, then that same debate rages across the capital market participant base. And it is indeed frequently at those times that exhaustion bottoms and tops occur… when one group of participants simply gives up and throws in the towel. Below are a series of random thoughts on the matter pieced together over the last couple of days.

My oil-trading friend Jim thinks this may be the start of an intermediate term topping process in the energy markets. I guess I don't know what would actually constitute an "intermediate term" correction? I mean… if the public and hundreds of hedge funds start liquidating their index commodity products (including oil) around the same time, its hard to see how that isn't going to be anything but a very violent process… with nothing that looks intermediate about it… once its in full force. I wonder how all the "speculation moving markets" nay Sayers will be explaining away price action when bids vaporize and crude drops $10 in a single day without letting many participants actually out in terms of position or dollars. I guess that will be all about supply/demand fundamentals too. Now I'm really starting to get itchy about not having an account. Volatility will be too much for me in energy but I think lower crude for 2 quarters will be huge for equities and to a lesser degree, for the dollar.

The last couple of days of weakness in the energy complex seem to have brought commodity bears out of the woodwork. While I happen to be one of those that think the excesses of the commodity bull market are growing akin to some of the excesses we saw in housing and before that, to the dot com bubble, its important to be patient and not jump the gun in a set of markets that can carry you out P&L-wise in a few short days. Sharp breaks with renewed buying interest have been a once-a-month occurrence in oil since the start of the year (except for June where the correction was sideways) and have to date only rewarded those who bought the break. The point is… I for one am not going to let one Newsweek article about increased trade with Iran and the northward turn of only the second hurricane of the season suck me in the same degree of bearishness that I felt during the late-May break in oil prices. As I said at that time, participants need to start getting punished for buying on breaks not rewarded. The 132 - 137 area for August crude is a critical technical area. Most of the month of June was spent in this range. To really have a flight to the exits we need to put all buyers from that churning period into red. Implications of that resolution or lack of will be huge for other markets… stocks most of all. My eyes are peeled but I'm trying to hold my emotions in check a little more this time. Perhaps that says something too.

Jamie Dimon in a speech yesterday at the FDIC conference said speculation is not the cause of higher oil prices. I myself am a bit tired of the term speculation. I think the things that bother people about the word might be an association with hoarding and price gouging… two very negative connotations. If we were to change that term to one more like… capital allocation… I wonder if that would that make a difference to some of the debaters. A capitalist economy depends on the allocation of resources from one sector to another. We don't call that speculation. When capital moves from bonds to stocks, what happens? Bond prices go down and stock prices go up. Every day in stocks participants shift from one sector to another. Out of financials and into the oils one day… out of oils and into financials the next. That doesn't seem to bother anybody. Isn't that speculation? No… its portfolio allocation. But I don't think any equity market professional would debate the respective effects of price. It is there and obvious for all to see. So lets drop the semantics and get down to brass tacks. Altering the allocation of capital DOES have a price impact on the underlying assets. Anybody who debates that has never sat on a desk or put on a position. I think the problem and the "out" for market apologists is the use of the word speculation. And I think polls among people like Hank Paulson and Jamie Dimon would have a different answer if they were asked about the effects of asset allocation rather that the narrow definition of "speculation".

July 7, 2008                 Hurricanes and Bombs 

5:00 AM New York time. Sorry I didn't post last Wednesday morning. And of course Friday was the US 4th of July holiday. Normally I let you guys know when I'm going to be skipping a day. That tells you how busy I have been. The oyster seed is growing like so many little weeds and I'm trying to keep ahead of them as far as my new, improved nursery gear set up goes. I fell behind last week and had to stock some of the equipment out using my old, time-consuming method. Man… "The moving finger writes; and, having writ, moves on". I NEVER want to take that step back again. In fact… I've written most of what will be a Monday post on Saturday morning because it looks like I'll need Monday morning for rigging up more gear. I've been staging my projects outside on my back deck in an assembly-line kind of thing but that's tough to do today as it's raining. I really don't think it has been a huge loss for anybody. I have been dead wrong on these markets. For one thing, the March panic bottom in stocks is now clearly nothing more than an intermediate bounce. The Dow is well through those lows and the S&P 500 went through last week. How far does another leg have to go to be completed? The Dollar remains a basket case. The Fed is letting it go in favor of the lower rates for the economy, which… is a very bad idea… since the lower dollar is a huge driver of oil prices, which are now a huge and growing cost to the economy. The net of it all amounts to making lower rates a net bad thing. We get one unit of good for lower rates, which are offset by two units of bad as oil prices continue to rally. I give up. Our Federal reserve is run by academics whose models say inflation SHOULD moderate as the economy slows. Too bad this ain't Princeton and we don't live in a model-perfect world. As Dave Lewis would say… the map is not the territory. I've even gotten so gloomy; I ordered a heating oil delivery for Monday to top-off my tank. Tropical storm Bertha has taken a turn to the northwest and is no longer a threat, but I do not want to go through the hurricane season without a full tank. I have no doubt what will happen to prices the first time a storm looks like it's headed for the US Gulf of Mexico. I also have little doubt at this point that the Israelis will use the final days of the Bush administration to launch an attack on Iranian nucular facilities. I think they know the same action will not be warmly received by the Obama administration.

Yes I used the word nucular. You know… we should have known what we were in for when Bush continued to use the incorrect pronunciation despite what I'm sure were numerous attempts from staff to correct him. I have grown to believe that each of us is always sending out little clues to our specific personalities through our words and actions. So what does that say about a major public figure who refuses to correct an obviously incorrect pronunciation, and continues to use his own moronic version. Yeah its wrong… but I'm using it anyway! I'm telling you… there's the personality in a nutshell and on display for all to see.

So I guess things just continue to deteriorate from here. There's no way I'm going to be climbing on board the gloom and doom express from a trading standpoint at this stage of the game, so I'm going to continue to keep my eyes open for potential contrarian opportunity. Reversion to mean will eventually occur but Dave Lewis has certainly proven to be right… sometimes the push through the historical range ends can be a big one.

June 30, 2008             A Visit From Dave Lewis

6:00 AM New York time. Dave Lewis and his family were in visiting this past weekend. Those visits always leave me a little more soul-searching than liver-venting and this time is no different. Dave and I have come to realize that we each share many of the same views on the mechanics of life… we simply have different ways of arriving at the same place and coming to the same conclusions. On Friday morning I was pissed at Bernanke and company for "not getting it". After this weekend I realize that… expecting… or even hoping… that they would "get it"… was a tall order to begin with and highly unlikely all along. Our current timeline of events is just going to have to run its course. The only lingering question that remains unanswered for me is whether or not to top off the heating oil in the fuel tank before things get a whole lot worse. In all of our discussions though… there was that ray of hope for the future. The leadership of a country is NOT representative of the character (or a soul… if you will) of a country. So Dave and I could sit on my back deck on a beautiful summer evening and debate the current storm knowing that each of us… in our own way… has prepared well in advance… in a country where there is a high degree of flexibility among her citizens to adapt, improvise and overcome. We also realized that flexibility to be who and what we are, at the current time, was in fact a function of living in a country where being an independently thinking individual is ingrained into the psyche of our still young culture by our founding fathers. We also know that, unfortunately… for our species… going all the way through tough times is the only way we will ever (eventually) truly learn from them and (possibly) avoid them going forward.

As for markets today and looking out short term… it seems there is nothing in the works right now from stopping the re-assertion of old trends. Oil is at a new high this morning. Gold is up and the dollar is lower. Regardless of how hawkish the Fed-speak is over the next couple of weeks, it's hard to see how the markets will allow them any traction from jawboning given the betrayal last week. That means there is nothing standing in the way of new lows for the dollar, new lows for stocks, a renewed up-leg for gold… though it has a long way to go to threaten new highs, and a continued ratcheting higher in the price of oil. I doubt I will participate in any of that.

June 27, 2008                 Bernice Bernanke

6:00 AM New York time. I have to say the Bernice Bernanke acronym was not mine. Gilmore came up with it but didn't want to use it for concern over offending our female readership. I have no such compunction. Sorry ladies. Watching the market action yesterday was one of the few times I let frustration over the markets creep into my private life demeanor. I was cranky and pissy all afternoon yesterday. Yesterday was SO avoidable. It didn't have to be that way. The markets were completely ready to accept even just a credible THREAT of higher rates… they were already pricing them in! And Bernice let them go. He let all of us down. He caused oil to go to $140. I'm almost ready to join the gloom and doom crowd now… and its not because I don't have faith in the character of the American people (of which I'm one). Its because my president is an idiot and my Central Bank chief wears a dress. This ain't Princeton or Cambridge!! It's the real world Bernice… you're in the SHOW now! You can't just plug variable into a model and generate a perfect solution. HE STILL DOESN'T GET IT!!!

What is painfully obvious to me is clearly not obvious to the Fed. The fate of the economy is now more intricately tied to the price of food and energy than it is to rates. For every unit of benefit we get out of lower rates we lose two units of value as the dollar weakens, driving food and energy prices higher. But I guess we may need those lower rates eventually… when the American people are finally forced to finance the fuel that goes in their tanks and food on the table. That would be the very end of the end game itself huh? And it will be no comfort to know that indeed US policy is taking down the rest of the world with it!

Bernice fails to see the counter-intuitive connection. Or… if he sees it, he is unwilling to make the leap of faith required to take the steps to get there. The stock markets reaction to the Fed's no-move and milk-toast statement on Wednesday was a classic. Prices originally rally but then fail as participants start acting on what it really means. Personally… I think the exact opposite reaction would have occurred had we gotten a hike of 25… or even another hawkish statement without a hike. The markets would have originally sold off but then come back as they again… realize the implications. The dollar would have certainly acted better and that (I think) would have kept gold on the defensive and at least made oil traders think twice before diving in again on the long side. But no. Compounding the problem is the waffling. Its now going to be that much harder for the Fed to get credibility in the market next time around when the DO signal an impending change in policy. GUYS… YOU CAN'T JUST ALTERNATE BETWEEN HAWKISH AND DOVISH AND EVERY OTHER WEEK AND THINK THE MARKETS ARE GOING TO TAKE YOU SERIOUSLY!!!!! I heard a statistic that this has been the worst week for the stock market since the Great Depression. Bernice… THIS IS A SERIOUS SITUATION.

Once again, I find myself glad I'm still not trading. I would have certainly gotten myself in trouble by now. And perhaps I should be cheering developments on… or at least not caring. After all… I sit in the local tourist hotspot between New York and Boston… and sell my product to wholesalers who service hundreds of shoreline establishments… which may turn out to be the only places left people from the Boston/NY metro areas can afford to get away to this summer. But I've got to put fuel in my tank too. So I do take it more personally. Bernice… you better start figuring this out soon or you're going to go down as one of the most inept Fed Chief's this country has ever had. And then you'll be in the company of your president… who I already have no doubt will go down in history as one of the worst of those we have ever had too! Have a nice day.

June 25, 2008                     Wednesdays Are Tough For Me

5:00 AM New York time. Back on Friday.

June 23, 2008                     I Didn't See That

6:00 AM New York time. I have grown to HATE anecdotal information. We had visitors in on Saturday with their boat docked in downtown Mystic. We strolled along the main drag to get to where we had decided to eat. The restaurants, shops and bars were jammed. I'll simply write the observation off to the town being the busiest tourist destination in CT in peak summer season… a place that would be crowded even if we were in depression. On Sunday, we had to go pick up a couple of gifts for upcoming toddler birthdays. The first stop was the Christmas Tree Shop. That store is the quintessential shopping place for cheap Chinese goods, including toys. Jill sees this little water toy for Sydney… boats and trucks with cargo that float and drive around a course and get picked up and loaded by a little crane. 10 bucks… how can you go wrong. So we get it home and start putting it together. Obviously made in China… wait… nope… made in the U.S.A. I can't REMEMBER the last time I saw a cheap plastic toy made in the USA. I give up.

OK… from now on, I promise to completely ignore my personal observations. I'm going to focus solely on official government statistics. Believing what you see with your own two eyes will certainly lead one astray in deciding which economic course we are truly on. It brings to mind a Frank Burns quote for an old M*A*S*H episode… "Unless we follow our leaders blindly… unless we follow orders without question… we will never truly be free." Here here Frank. Oh yeah… I guess I should tell you… I'm trying to cut my Canadian oyster customers out for the summer, as local demand from my existing domestic customers is starting to outstrip my ability to supply them. Ho humm.

Lets stick to the newspapers and see what that brings. It looks like there is increasing momentum in Congress toward major regulatory reform in energy trading. I'm not sure how I feel about this. What I CAN envision… is a situation where prices come off in anticipation of major changes, OR as demand destruction continues to change the underlying supply/demand balance, and lowers prices somewhat, making any regulatory changes a "horse is already out of the barn" situation… always a dangerous situation. A couple of points I will touch on again briefly. IF the run up in energy prices IS bases solely on supply/demand, then any proposed regulatory changes regarding trading will be seen as a quasi price control effort, ultimately driving prices higher still as usually results from a typical price control effort. Second… while I consider myself a free trader… I have to say that current commodities regulation is a hodge-podge of arbitrary rules and regulations that are loosely connected to what I consider "free-market" principles. Dave Lewis owns cash gold. He has bought it and paid for it. THAT'S totally cool. But when you buy a contract of West Texas Intermediate on the NYMEX, you have to put up a mere 8% of the contract's value. If you're and institutional account, and buy that contract using a line of credit supplied by a bank for the purpose of speculative trading… you have magnified the degree of leverage even further. Is it truly free-market capitalism when you let market participants buy energy products without actually paying for them? To me that's a huge gray area. As someone who actually PRODUCES a food commodity, I can tell you that the logistics and infrastructure issues that have to be resolved in order to handle and move the product are significant. I'm not sure how I would feel if parties completely outside that necessity were having a big influence on my prices… even if they WERE higher.

Now for a few quick price action observations… for all the negativity on the US economy… we have only retraced about half the mid-March to mid-May rally in the S&P 500 index. It's like we've had new lows in news without new lows in price. The dollar hasn't even come close to a retracement and continues to eat into overhead resistance. As I look at inflation news from Vietnam and other countries in the region… it really highlights to me that the rest of the world is going to be as susceptible or more to the same negative factors that are hammering the US right now. It may indeed be a case where we catch the global cold first, suffer least comparatively, and come out of it first too. What does that scenario do for the US dollar and other capital markets? The energy complex is going to be a key indicator going forward. Prices have largely recovered from the China price increase news and it is acting far better than I would have thought given talk of a more restrictive trading environment. Heating oil (diesel) is carving out a very interesting daily chart with a sharp break in late May early June, a subsequent failure to make a new high, followed by another slow inside drift off. The ability or lack thereof to make new highs in the next couple of weeks will go a long way toward influencing my thought process. If we make a lower significant low in the complex I think it means the peak is in and you can start selling rallies. If it goes on to make new highs then all bets are off and we will have to wait out yet another up-leg. That will then reverberate through equities and the dollar as a negative stimulus.

June 20, 2008                     There's Irony Everywhere

4:00 AM New York time. I don't know if yesterday's news of another (the second since November) and even larger increase in domestic fuel prices in China is a significant fundamental supply/demand event for the global energy markets. I don't know if it will be a watershed turning point in turning the bull market psychology. This morning's financial press paints it as a two-sided event, with both long-term and short term, as well as bullish AND bearish implications. I certainly am not smart enough to know myself. And no doubt the raft of energy analysts CNBC will be parading out today will have a divided opinion as well. What I DO know… is that NYMEX crude oil had one of its biggest down days in nominal terms ever, and probably one of the largest in percentage terms too. Though with the recent volatility, even a $5 move in crude is not something that makes a huge visual impression on the daily charts. I will remind readers… it doesn't matter what you or I think… it matters what the market does. Watching yesterday's price action I can guarantee there were trader/investors taking risk off the table on it. I would also be willing to bet there was some big spread trading of long gold/short oil going on. I like that trade myself.

Life is full of irony and paradox. So to me… it makes perfect sense that the US energy markets could put in a top right around the peak 4th of July summer holiday driving season. I also think it makes perfect sense that the US Dollar could put in a significant intermediate bottom just as the news on the US economy and outlook for her capital markets reaches maximum oppressive (though a great many readers probably think we get more oppressive still). Even this column to a large degree is full of irony… it has indeed come full circle. When I first started writing with Dave Lewis, I think back in Feb of 04, the commodities were just getting going. Gold was just over $400, but still three years into a bull run that started in around Feb 2001. My first pick in my model portfolio was Bunge. Remember that? I thought I was paying up for the stock when it got above $40/share. Guess what… its $120 now. I remember telling some friends (not sure I wrote about it… probably… but I certainly can't find amid the over 675 pieces I've posted since then) at the time that I thought we would eventually see some kind of food crisis before the whole thing is over. I'm NOT patting myself on the back. I'm simply saying that its 4 years later, a lot has changed, we have what many would describe as a food crisis going on, and in yet another ironic twist, I find myself wanting to go against the crowd once again!

My account paperwork is slowly working its way through the bureaucratic python, which is Citibank. I think a copy of a driver's license had to be faxed over yesterday. By the time that snake finally shi*s out an account I can trade, I will have been forced into one of my most patient stints on the sidelines ever. The irony there… a forced exile is probably the best thing that could have happened. And what's interesting is that I find myself with an even GREATER desire to put on EXACTLY the same macro trades as before this whole process began. Yet… they all seem to still be setting up for what I think is a significant move and none have run away from me. All of that is a very good sign in my book.

I think oil is in a topping process that will see a return to $100 by year-end. I think we're going to have a big break one of these days and I want to be ready to sell the first corrective bounce to that. I think the dollar is in the process of putting in a significant intermediate low that will take us on a rally through year-end as well. Gold is so over-sold right now I wouldn't be surprised to see it bounce even without the dollar continuing lower. I think we're eventually going to see decent sized corn and soybean crops, despite the flooding. I think stocks are going to benefit from all this, and despite the threat of higher rates down the road, are going to have professional managers chasing them to keep performance up by year-end too. Essentially… we're getting close to one of those 6-month macro market pivot points that regularly come around and reward those who've been getting crush to date trying to pick contrarian trades and punish those who've grown complacent with status quo trends… essentially the commodity, short financials trade.

I won't even go INTO the irony going on in Oysterland right now. Have a great weekend.

June 18, 2008                 Out In The Fields

4:00 AM New York time. No column today. In true farmers-of-old fashion I'll be out in the oyster nursery for sunrise and back from my chores around sunset. Thank heaven for the length of the days this time of year. See you Friday.

June 16, 2008                 I Like Em' Young

6:00 AM New York time. I've often said… trading/investing is a very personal endeavor. And while so much market hype tends to surround later-stage, hyper-volatile, widely participated in, and elevated-public-concern… of more mature market moves… I've come to realize I like a much "younger" market to participate in. Two good examples of each are the oil bull market and the dollar bear market. I say dollar bear market because it is indeed the dollar bear market that is mature, and the emerging bullish behavior which is very young… so young that a great many participants would debate me that a "bull" market is actually underway. Conversely… when I look at oil, I see heightened volatility with a tremendous amount of press coverage and a very skewed analytical slant. Regardless of those skews, oil remains a market that the objective observer would have to say remains in an up-trend. The problem for me with late-stage market trends is that much of the surrounding information has already gotten so stretched… that it tends to appeal to my contrarian nature, even though prices can actually continue to run a lot farther into what one might consider "extreme" or "emotional" territory. I am growing more OK every year with the fact that I will NEVER be able to participate in that kind of market. I fully realize… because of my own personal biases, am going to miss EVERY blow-off bull top that is yet to come… simply because of my own personal tendency. That's significant… since it is indeed those very moves that I think a great majority of participants live for trying to partake in.

There is an easy and almost opposite situation building in the US dollar. Here there remains a sizable analytical, and longer-term position skew to the downside. Yet objective observation of price action shows a market that continues to move in a contrary direction to those skews. The US dollar continues to act better on good news than it acts poorly on bad news. To me, this is an indication of an increasingly emerging trend… or what I would call, a "younger" market. If I'm bearish crude oil… how do I proceed to execute that strategy given the volatility and persistence of trend? I can't. Even if I'm BULLISH crude oil… again… how do I execute that trading plan under heightened price volatility? To get bailed out eventually by persistence of trend is far too risky for my particular style. The dollar represents and much less risky, accident-waiting-to-happen trade, which is increasingly resistant to the down side with far less analytical and position skew. Regardless of ones fundamental macro view on the world economy, from simple rules of risk and reward, it seems obvious that it will be easier trying to pull money out of the FX markets right now than energy markets.

From my own personal technical perspective, I am impressed by recent dollar price action. Perhaps the current move will turn out to be nothing more than a more "significant" correction in a larger bear market. But for right now, I see a market that has put in now a higher low of significance, followed by a higher high of significance. Given the level of bearishness I see and read on the US economy and its outlook, which has already been priced in, I see tremendous potential to surprise on the upside. The 75 - 75.50 area in the Dollar Index should still offer formidable resistance, but I think pullbacks from there offer significant opportunity for positioning for the larger move higher into year-end.

June 13, 2008                 Magnets For Trouble

6:00 AM New York time. I've got to work on some oyster gear this morning but here's a quick story that might have some entertainment value. Sam Israel… former manager of Bayou Capital is all over the news in one of the juiciest Wall Street intrigue scandals in some time. I met Sam one time… through his brother… Larry Israel. Both brothers hail from one of the prominent families of New Orleans. Their father was a big hitter though I'm not exactly sure what he did to make his fortune. Anyway… for a time back in the eighties, Larry was a floor broker in the S&P pit and somehow got hooked up with the head equity trader at Soros, we'll call him Joe. So every once in a while, Larry would come to New York and take us all (the trading desk) out for a night of entertainment. That was how I met Sam. Months later, in October 87, Larry ended up having the dubious distinction of being involved in a minor scandal himself. It was the day of the 87 crash. As I remember, George had visited the trading room early in the day and early in the sell off… the fund was already long stocks generally but thinking the sell-off was a good opportunity, he bought a decent sized S&P trading position. When he came back in the afternoon the market was falling apart. Thinking back on it, it was actually the first (and only) time I ever saw George come close to hitting the panic button. As the selling continued to gain momentum George decided he wanted to sell the S&P position he had bought earlier in the day. Who was the broker Joe gave that order to… none other than Larry Israel! In Larry's defense, lets face it; the middle of a panic is not the time to be trying to execute a large order in the futures pits. But Larry tried. In the end the order got butchered, George got pissed, and made a big stink with Larry's clearing broker (oddly enough… Lehman… who is now in the middle of their own little firestorm of controversy). George's claim was that that the order was mishandled and he was entitled to redress. I don't think anything ever came of it. The point of the story is that these two boys just have a knack for finding themselves in the middle of trouble. And it's not the first time.

June 11, 2008                 A Good Day For A Bounce

5:00 AM New York time. Not particularly motivated today, and I have a very busy/long day on the water planned. I have just two things to say this morning. While the dollar has had tremendous bad news thrown at it lately, and bent but not broken price-wise, it remains a trade that is not going to run away on you. Right now there is tremendous technical impetus for the Dollar Index to stay within its 7150 - 7400 trading range. Resistance from prior highs set this year and prior lows set in Q4 of 2007 look to me like a gauntlet of technical points. I think eventually, as time wears on, the Dollar will eat its way higher up through those points, but it's going to be a long slow go. As such, related markets like gold, are probably a trading buy at key Dollar resistance points.

Oil is developing into a market with its own and separate set of problems, and issues but it is not going to be in real jeopardy to the downside until the Dollar makes that meaningful breakout higher. And since that may take a while, oil may fart around between recently set highs and $120 for the next month or so. If oil does fall of its own accord in the interim, that will speak volumes to the position skew and changing perception of fundamentals. I continue to view the recent spike in volatility as a classic sign of an extended market in or entering blow-off condition.

June 9, 2008                     On Wage and Price Controls

6:00 AM New York time. On Friday I got a call from Gilmore. Seems one of his Treasury contacts needed so speak to someone familiar with the oil markets… go figure. So Gilmore gave him a couple of contacts including my oil-trading friend (we'll call him Jim). Jim and his team have been scratching their heads over this oil market recently and as a result; have been keeping trading risk on the low side. So despite the volatility, Jim and his team were out on the golf course at a customer outing. He told the person from Treasury via cell phone he had no clue what was driving prices to such extreme price movement that day or the day before.

Then… on Saturday morning, I get a call from Jim. He wants to speak to this guy from Treasury as he THINKS he knows what had pushed prices up over the past few days. He had made a few phone calls since coming off the course. Seems they had a customer some time back who had their heart set on the strategy selling option strangle spreads in the crude oil market. That's a bet that the market will stay roughly bounded, and entails selling both out-of-the money puts and calls and collecting the option premium. But the customer had gotten so big in terms of position, that Jim (and his firm) had decided it was an unacceptable counter-party risk, and agreed to work with the customer to jockey out of the trades at his firm and get them to another. The position juggling was accomplished with little market impact, and history moved on. Until Friday that is. I guess Jim had heard or had suspicions that the firm they had long ago shied away from had continued to grow larger and larger positions under the same option-selling strategy. For anyone who has been around the markets any length of time, you know that selling out-of-the money options works 90% of the time. The problem is that the 10% of the time it doesn't work, your position can get crushed. Options that you are short and were worth 50 cents, over a very short period of time can be worth tens of dollars. Jim's view was that it would be fairly easy to check on by simply looking at the changes in open interest in these out of the money options. And there are only a few investment banks on the Street that would have been big enough to take on the kind of risk this firm had/was putting on.

I have no idea if indeed Jim's answer to Friday's market movement was nothing more than a colossal bad position gone horribly wrong, or was something else entirely. I am confident that the impact of Morgan Stanley's market call of $150/barrel by July 4th last week, when their entire prop desk (huge by the way) is lined up that way, AND they know of a big market participant in trouble and trying to get out of a position, could certainly have rallied the market a long way. Does it account for $16 in two days… who knows?

Here is what I DO know. Anybody that STILL thinks the price action in the energy markets is purely supply demand related and has nothing to do with speculative positioning, after what we saw the last two days, is blowing smoke up your ass. I don't see how anybody at this point can deny the obvious. Still… in order to provide equal balance to the possibility, I would suggest the following: I don't think there is any doubt at this point that the US government is going to put pressure on the exchanges and Federal Commissions (CFTC/SEC) to curtail the ease of which capital can move into the energy markets. If indeed our current situation is supply/demand driven, then I suggest that such efforts will be met with a rush of buying… just as so many historical examples of price controls have generated in the past. However… if the bull market is mostly speculative, then such legislative and regulatory threats will act to deflate the bubble and generate a reduction in price (and participation) over time. Might capital simply move abroad to other commodity exchanges? Sure… but then we will start to see prices on those exchanges lead rather than NYMEX.

Regardless of the outcome, I will not allow myself to get sucked into thinking we are still in the early stages of an energy market rally, when we just saw daily upside price movement that set a new all-time two-day percentage gain. Such occurrences are late-stage, blow-off type events, that to my contrarian mind set, I will ALWAYS have a leaning toward fading. Can they go farther…? Sure. But we are in a zone now where the degree of risk… both ways… is outside of my normal safety zone of acceptable volatility.

June 6, 2008             Glad To Be On The Sidelines

6:00 AM New York time. Yesterday proved that some days its better to just be shooting my mouth off about markets than actually trading them. Yesterday would have been painful. Yesterday showed… regardless of your view… you have to wait for the right corrective opportunities to put positions on. But since I remain in the same situation, I'll continue to play the roll of the strategist with no risk on, but all the confidence in the world about where things are headed.

I see yesterday as corrective action to a significant intermediate trend change. Crude oil tested a major trend line connecting the April and May lows, and the Dollar Index tested the March and May highs around 74. Stocks… who knows? Amazing they could do as well as they did yesterday given other markets. I have a hunch there is some performance pressure starting to creep into stocks as managers begin to worry about being under invested and behind their benchmarks. We'll see. 1440 in the S&P futures is a big area. Below that one can still argue that we're in nothing more than a corrective rally in a bear market. An intact bear trend and corrections to that trend nobody has issue with, given the news, credit market conditions and the economy. Above that and we're getting into trend-change territory… much harder to justify given the macro backdrop. That's a big step… getting participants to buy into that one. I think eventually the market will go through but certainly not on the first attempt.

Now for something more topical… I've had a number of discussions with readers lately about "fundamentals". I am generally not a big fan of any data set or number that is open to "data massage" or "interpretation". Basically… any economic statistic that can be debated from either side has very little value to me. Money supply is one of those kinds of statistics. I can however buy into certain economic analogs where applicable. For example… I think Europe's history with high fuel prices could be instructive to the type of demand destruction the US will see in gasoline demand. My suspicion is the last two decades of high and rising gasoline prices in Europe will foreshadow all manner of behavioral changes we are starting to see in the US including average vehicle size and mass transit usage. Sure… there are logistical disparities between the two but I bet the consumer behavior trends will be surprisingly similar. I'll do some work on that this weekend and let you know what I find.

US Non-Farm Payrolls are today. As always… more important will be how the market interprets the information. My bet would be that we have another day or two of corrective action before the new intermediate trend direction resumes. That direction is lower oil and higher dollar. The proof will be in the pudding. Oil must put in a lower meaningful high and the Dollar Index must put in a higher meaningful low. Have a great weekend.

June 4, 2008                 Lehman Worries

6:00 AM New York time. I have a crap-load of work to do in oyster-land today so I'm going to keep it brief.

I tend to think a drop in oil prices will outweigh new financial concerns surrounding Lehman… but who knows. A run on a bank… like it happened at Bear… can occur in lightning fashion. 40 billion in capital means nothing when your wire room is swamped by customer requests to get money out. The only way to find out for sure is contact someone who works in that department at the firm, or ask somebody who has an (institutional preferable) account at Lehman, what they're doing. I suspect if bad things don't materialize for them over the next couple of days, while the rumors persist, they'll be fine. Like the fable of "crying wolf", such reoccurring rumors have decreasing impact over time.

Bernanke's comments yesterday have solidified my long-held (last couple of months anyway) suspicion, that the Fed is finally getting the message that dollar-driven commodity inflation is worse for the economy than slightly lower rates are good for it. Normally markets would scoff at this initial feeble attempt at jawboning. So the price reaction yesterday is more an indication of how nervously short dollars participants in the FX market are. I remain of the view that the correlated trades of short dollars, long oil and long gold, are all unwinding together. Unfortunately… by the time I get my trading account back, this trade will have run its course and it will be time to go the other way.

For certain readers who have been warning me of the "blatant socialization of America" as reason for long-term bearishness in the US currency, you are in good company. I'm hearing many more worries (and complaints) from much more mainstream participants that yourselves. Associates who have never expressed this concern before are expressing it now. I'm not sure how really worried about it I am. I know that bureaucracies only get bigger, they never get smaller. And I know that with each new law or program, there is someone needed to administer it or oversee it. The program may go away but that employee won't. I also don't think there is much any of us can do about it. It seems a natural course as the world continues to get smaller and our species homogenizes. Command economies move toward the right and capitalist economies move toward the left.

June 2, 2008                 June Already

6:00 AM New York time. Ahhh… we're really getting into good oyster growing weather now! Yesterday was kinda steamy starting off and slowly switched to just plain warm with bright sun and a steady SW wind. I wasn't there but I know my freshly stocked little ones were just lovin' it.

I'm going to keep it short today. First off… the Dollar Index, after testing the 72 level for a couple of days there, has now held and is (was) rallying back. What we need to see is a new significant high… say… through that low 74 area where it met resistance last time. If that happens, the market can start convincing a potentially MUCH larger group of participants that the Dollar might have some upside legs. Per usual… that will be a huge determinant of the "long commodity trade". Gilmore has been warning me that a good percentage of the analytical community is ALREADY is on board the dollar bottom trade… and so it should already be considered from a strategy standpoint… a "crowded trade". I guess he sat on a panel last week and everybody there (himself included) thought the dollar was bottoming. I hear that… and all I can say is that sometimes you just have to fall down on one side or another. And I really DON'T think that long dollars is where the majority of RISK TAKING participants are positioned.

Oil for its part, had a couple of bad days last week. Both Tuesday and Thursday had very weak closes. Prices for July are off 9 bucks from the highs put in 8 trading days ago. Still… so far, there is nothing to say last week's move is anything more than corrective… similar to the late March consolidation. Prices obviously resolved much higher after that. I need to see another week of weak prices before I'm willing to say the long-oil trade is over for the intermediate term. Still… my bet (if I had an account) would be for the short side, though I think you'd have to have something already on. I can't see myself selling this morning's level. A bounce back north of 130 however and you start getting back into decent risk reward territory. My longer-term bet is under 100 by Christmas.

That's pretty much my 6-month view right now anyway. I think the Dollar and stocks rally for H2 08, into year-end, oil and the commodities sell off… the country breathes a collective sigh of relief (having dodged a huge economic bullet). That will go a huge length to reducing the position skew and perhaps even throwing it into imbalance the other way. 2009 starts with a totally clean slate at which point you take a fresh look and all bets are off. Six months for me is PLENTY of time to catch a decent contrarian trade and post some results for the year.

The longer term game isn't over, but it needs a decent breather.

May 30, 2008                     A Copy of a Reply To A Reader 

5:00 AM New York time. This is a copy of a reply I sent to a reader. I have had many interesting debates but I think I finally poured my liver out on this one. So here you go:

OK (John Doe)...

I keep trying to talk market psychology with you and you keep trying to convince me with statistics. I tell you I don't like to argue statistics because they are so subject to interpretation and manipulation. But you win! So here goes:

Seems a great many of your sources point to US M3 growth as a sign that the US is simply pumping money and devaluing the dollar. In a few simple clicks of the mouse I found the following information... seems the US Fed is not the only one working overtime printing money. Then I did a little homework on the "normal" growth of US M3 up until the time it stopped being published. Then I took the latest FRB H.6 release, took the historical NSA M2 data, added to that the historical data for "other memorandum items" as a rough proxy for additional items that would have been included in M3, and came up with a Y/Y growth rate of 6.8 for M2 plus Other Memorandum Items. Personally... just from a cursory view... I don't think 6.8% growth is all that big a problem and it doesn't seem like very far off the historical norm. The piece you sent me has a chart of M3 growth going through the roof. Please... don't show me a chart of nominal ANYTHING and expect me to take it seriously. In a world with expanding population and therefore commerce... 99% of all charts measuring economic statistics will look the same because demographically... we're always adding more people globally into the statistical base. I mean c'mon... I wasn't born yesterday. But if you take that nominal number and generate y/y growth, the chart looks totally different.

PLEASE... DON'T ARGUE STATISTICS WITH ME! I have spent goo-gobs of time, day in and day out, when I worked at Moore Capital trying to build econometric models... digging through the numbers and the data... cajoling and probing government statisticians and analysts... trying to make an OBJECTIVE appraisal of as many fundamentals as possible in determining currency and interest rate levels and predicted movement. I even got the nickname "Data Boy" for a time... and that was within a staff that had a handful of PhD's in economics.  My conclusion... I TELL YOU IT IS CHAOS!!! Correlations hold for uncertain periods of time and then vanish like a fart in the breeze. That's how two economists can take the same data and reach two opposite conclusions!!!

I greatly enjoy our debates. But I also think we are very far apart in philosophy, methodology, and investment/trading time horizon. So we dialog back and forth, but neither one makes any headway in convincing the other. I think deep down that is the case with everybody out there in the markets. We all shop our view around for like minds, not just to convince THEM... but to make ourselves feel better about our OWN views.

That is why I have chosen the psychological route. For all the economic statistical disparity... the one constant I see again and again... is our species propensity to react emotionally within a finite and discernable range. If the dot.com NASDAQ mania in 2000 was the extreme in paper asset bullishness... then limiting of rice purchases by Costco may represent an extreme (at least in the intermediate term) in commodity bullishness in 2008.

I think if we were to ever sit down and actually discuss these matters, we may end up understanding each other better. That's how Dave Lewis and I can each have disparate views, yet each have great respect for that other view. We are OK with the fact that we each see life (and thus economics) differently... and that the capital markets are simply a gaming table where we test out our thesis.

All the best John.

One comment on the markets today. It's Friday... in a holiday shortened week... with certain commodities in retreat... with big positions still on the sheets. This could be a look-out-below day.

May 28, 2008             What I Said Tuesday

6:00 AM New York time. I was filling in for Gilmore yesterday on the FXA screens. Why reinvent the wheel? Here is what I said yesterday, typos, misspellings and all:

     [14.00/10.00] Consumer Confidence fell to 57.2 vs a revised 62.8. 60 was expected. Current conditions reads 74.4 in May vs 81.9 in April. Future conditions was 45.7 vs 50 in April. Overall confidence was the lowest since Oct 92. Jobs hard to get was at 28, unch from April. New Home Sales rose 3.3% vs -11.0% last month. Median prices rose to 246,000 from 242,000.

     [14.15/10.15] Plant for Gilmore here. Forget Consumer Confidence. A lot of that is energy and energy prices are fully discounted in these numbers. Nobody out there in the public thinks energy prices can come lower... especially since we have just entered the summer driving season. Here's what I think. Energy markets are facing a tripple whammy. Consumers are looking for all kinds of ways to trim consumption and save on fuel/energy costs. The economy overall is slowing, trimming demand anyway. And... the hot ticket in Congress right now is looking into the role of speculators in driving energy prices higher. I think the combination of these factors are going to push nearby crude prices below $100 by Christmas.

     [14.25/10.25] Amid all the numbers we also got Richmond Fed Mfg Index, it fell to -3 in May from 0 in April. And looking further at Home Sales... aside from the increase in Median Prices, its worth noting that sales in the Northeast were up over 40%.

     [15.15/11.15] Plant again... I'm going to talk some more about oil. Its such a key factor to all markets and besides... I'm so bearish right now I can't see straight. I think one of the things you want to look for in coming days are the closes. Yes... perhaps I'm stating the obvious, but this is a market that has had many instances over the past weeks with intraday weakness but participants always managed to buy those dips and close prices well off the intraday lows. So the change in tone bears need to see are a series of weak closes. Instead of being rewarding for buying those dips, bulls need to start getting punished for that action. If we can get a succession of weak closes, we may indeed see enough cumulative technical damage, that even longer- term investment types will start to question their positions. This I will say. If you thought commodities are tough to trade on the way up... wait to you see how they shred people on the way down. Imagine a $3 move in crude where only 500 contracts transact. When these markets turn unfriendly, just getting out will be a gift.

     [15.55/11.55] Yellen is on the tape saying the level of interest rates is appropriate, says effects of credit crunch mitigated by lower rates. Says economic activity weak across most sectors. She thinks zero real fed funds should boost growth, which she expects a gradual step up to. She says the inflation data is disappointing but core rates should moderate going forward. Nothing new here.

     [17.35/13.35] Plant back again. Think I know why so many analysts have such a hard time admitting that speculative activity can have a significant impact on capital market prices... especially since we have a number of fine examples of the effect in the last few years alone. Capital flow overwhelmed even the Federal reserve, helping create Greenspan's "conundrum". Capital flows can and do, have a huge impact on market prices. The problem I think is that the phenomenon negates so much fundamental analysis infrastructure, which so many on Wall Street have come to rely on to base decisions on. If it all becomes simply "where the money goes", why even bother listening to what analysts are saying. Just get on board the latest wave of capital. Deep down... none of us really want to think that our investment fate is more tied to a casino bet than a mathematical equasion.

     [18.50/14.50] Crude oil closed on NYMEX down almost 4 bucks! Thats the kind of close that will turn the make participants think twice before buying on any weakness without regard to risk. Thats the start of a change in trend. Know this... there are plenty of bearish fundamentals out there waiting in the grass to be discovered. If today's weakness becomes tomorrows weakness which becomes a down week... rest assured... those bearish fundamentals will be all over the papers this coming weekend. Many will be wondering why they hadn't recognized them earlier. Its a classic.

     [19.30/15.30] Dollar continues to drift higher as the afternoon wears on. I can't help but think that oil, the dollar and gold, are all correlated trades... with the same broad fan/participant base. As such, I could easily see those three markets getting into a game of leap frog, trading off days as the price leader. Hence... weakness in oil becomes strength in the dollar... and so on... and so on. All of that will be net good for stocks.

May 23, 2008                     US Holiday Friday

6:00 AM New York time. It's going to be a holiday market today here in the US. All I'm going to say is that the Dollar Index did at least stop around the 72 level before bouncing, and oil had a pretty decent down day after that 4-dollar rally on Wednesday. Right now… none of that means anything. Only if those developments get built on… will there be reason for me to grow more optimistic. Right now new lows in the dollar and new highs in oil seem baked in the cake. There is NOTHING to indicate that anything has changed in how participants are trading/investing.

My brother called me form California with an interesting anecdote. Seems there is a real-estate developer in their area of Southern CA who is offering a 2 for 1 sale. Buy one 1.2 million dollar home in one of his upscale neighborhoods and get a second 400,000 home in a different development for free. They thought is was a joke at first… but no… its true. There's a new low in desperation for you.

This column will be back next Wednesday.

May 21, 2008                     My Inflection Point

6:00 AM New York time. FYI… the John Williams Shadow Economics Statistics piece on the US as the next Weimar Republic is making the rounds on mainstream Wall Street. I even heard it mentioned (not the piece specifically… the concept) in passing on CNBC. I have occasionally been asked to link what I consider "fringe" opinion pieces to this column… in order to help "spread the word' so to speak. I have always declined. This time it has happened all on its own.

I get the sense of real nervousness out there… lots of fear. I can't say I see it directly where I live, but I hear it in conversation with people who live in more urban areas… especially here in the Northeast. So far… I remain fairly insulated out here in southeast CT. I have largely given up on reading much into my own local anecdotal info.

What I will say is this… fear is indeed one of the hallmarks of a crisis tail end. Fear and elation are the two emotional extremes. I do not see how one can point fingers to the excessive "can't fail" claims real estate enthusiasts were making three years ago and not be willing to point the same finger at the cries of gloom and doom today. However… I hereby acknowledge all those who have warned me that this time things will be different. Perhaps they will be right. Maybe this time we will plough right down through the historical standard deviation range lows and end up with one of those once-in-a-generation, extreme-case events instead of the basic once every 10 to 20-year standard corrections to excess conditions. And I also understand, if that occurs, it will be basic economic survival, which will far overshadowing the normal condition of looking to profit in the markets from swings in fortune.

I THINK I have already covered the latter. Over a decade ago I gave up the paper world for production of a tangible product… in an overall declining supply environment. I still have my fingers in the capital markets but they are not where I draw the majority of my living. My biggest problem remains to this very morning, growing enough product to supply demand. I gave up crowded urban/suburban conditions for a more rural setting. I downsized my life years ago (children's toys notwithstanding). I carry a small mortgage and very little other debt. Yes its developed Connecticut but our home is in the least developed corner, surrounded by working farmland.

So… against the recommendation of others… many of whom I greatly respect… I continue to hold out for a significant turn in the markets. The June Dollar Index is trading just above my 72-target area. I think anywhere in here you (or I) could put the trade on. As I told my friend Jim yesterday… it is not a statement of confidence or denial as to the economic reality. It is a simply a favorable risk-reward trade… nothing more. With all the fear and bad news… with Warren Buffett and George Soros out there warning investors against the US currency… and the recent rollover of the technical picture… one should expect the Dollar to resume its trend direction lower. That means it should take out the 72 level I am watching. It should then go on to make a new low. Gold will respond in kind. So if it DOESN'T… with all the news… with all the bearishness… then I say that there will be potential for an explosive reaction back higher. But even if I am wrong… what is my cost. If I get long at 7210 and the market goes on to make a new low… what is the cost… a thousand bucks a contract. But if the sell off stalls, if the Dollar puts in a higher low, and then turns around, what will that say? You will have had a fresh wave of fear, a fresh wave of pessimism, without a corresponding price capitulation. What then? You see… those are the very trades I look for. To me… that case would have all the hallmarks of exhaustion and the "accident waiting to happen" trade.

There are always two sides to an argument. LIBOR rates have come way off. The TED spread has come way in. There are signs that lending between institutions is loosening up again. But that is not the news participants are choosing to focus on. $4 gasoline and heating oil prices are in our face everyday. Not the borrowing rates between banks. The Saudi's say speculation is responsible for much of the move higher in oil prices. T. Boone Pickens says it plays no roll. Both parties are intimate with the oil market and should KNOW the TRUTH… yet both have opposing views. Welcome to the paradox of life… there is no truth… only perception. And perception can swing its group focus far faster than the underlying "facts" can change. Good luck the next couple of days. WHATEVER side you are on.

May 19, 2008                     A Critical Test

6:00 AM New York time. Not much to report from this weekend. Basic stuff… talking with the neighbors about the advantages of downsizing… contractors, costs and tax advantages of putting solar panels on the roof… sources of information on green supplies and building ideas… you know… the usual. Call me the optimist… but the net result down the road for the US of all these increased costs in running a house with a couple of cars is going to end up being a good thing for many people. It will be a great motivator for the reordering of priorities. Many of which I have been saying needed reordering for some time.

Markets are at a critical juncture. A number of seeds have been planted for a change in storyline. The Fed growing increasingly concerned about inflation… more so than a weak economy and wobbly credit markets for the first time in a while, the importance of the Dollar in future price prospects for major necessities, and the idea that a bit of a speculative bubble has formed in the energy markets. I still believe a sizable position skew short the dollar and long commodities generally exists… certainly among the larger, longer-term cash players anyway. All the ingredients are in place. The question is, will there be enough interest from faster-money, bottom picking types, to stop this trend reassertion and turn it around, essentially creating a technical pattern of a higher significant low, and thus facilitate a run back to the recent highs, and prospects of a significant higher high. That is what we need to see in terms of price behavior. That would put additional fuel on the fire that the underlying fundamental perception in changing.

The Dollar Index had a nice corrective run to 74, but it was not enough to change the underlying storyline or price trend. Now the Dollar is falling again. If you remain bearish and were waiting for the upside correction to run its course so you could reestablish shorts or maybe buy some gold, you had (and still have) the opportunity. If however, you are a wise-ass like me, and think that the current macro trend has run as far as its going to for now, and risks for a larger, longer-term corrective move remain a greater risk, then this current sell-off in the dollar was made for you. The Dollar Index sits at 72.74 right now. A pull back to the 72 even area would provide a decent retracement to the up-move and would take prices for the index back into an area of congestion that lasted from mid-March to mid-April and should offer pretty decent support. The risk reward from here would also be very low. Contract lows of 71 basis June would be just below, close enough to invite participants to try for them if they have the ass… part of the critical test.

Obviously, I'm in the minority that the shift in story and recent improved price behavior is anything more than corrective. That's OK. I frequently find myself outside the crowd. That has never scared me. To me it's more of a risk-reward issue. At this stage of the game, I see a lot more potential for a 6-month surprise upside and associated change in reasoning than I do for a return to the same old bearish-dollar status quo.

Impacts for the other markets will be huge. If the dollar breaks to new lows, it's hard to see why gold wouldn't go back to its old highs. And oil will have zero chance of coming off. I think stocks roll over too at that point. They have had a good run but they need something a little more tangible going forward that the market background is really changing. Bonds will trade inverse to stocks if that happens.

So this whole thing is a Dollar trade. And that makes sense. An intermediate term trend change in the Dollar would solidify the perception that the Fed "gets the message". It would solidify the idea that credit issues continue to fade as an issue. It would reinforce the idea that the commodities run up in those latter stages was speculator driven and predicated on the dollar continuing to fall. As I see it. Much is at stake in this trade. Not just from a trader's standpoint but for the consumer and the real economy. The wheels are in motion. Let's see where they roll.

May 16, 2008                 Our Own Worst Enemy

6:00 AM New York time. Markets are amazing. And you would think that participants collectively would learn from past experience. Yet time and again, history repeats itself, sometimes (as is the case now), several times within the same business cycle. Within the great bull markets are sewn the very seeds of their own destruction. I'm talking about bubbles… manias… whatever you want to call them. The lead article in this morning's WSJ talks about them. How can investors profit from them without getting caught the wrong way in them? How can policy makers work to short-circuit them? What's also quite funny, is that each time they arise, there is a prominent, and very vocal majority who will claim that no bubble exists. That supply and demand is purely responsible for price action pressing extreme percentiles of both volatility and annual percentage gain. There are plenty of very smart people, experts in their field, who say right now that oil prices are perfectly justified by fundamentals.

I can agree with much of this but in a different way. First of all, fundamentals DO justify the current level of energy prices. But the fundamental is that of capital flow, not supply demand. The WSJ article says bubbles gather momentum based on supply demand imbalances but disconnect in their later stages. There are over 3 million contracts of open interest on the NYMEX in crude and products. Folks… at $125,000 approximate nominal value per contract, that's 375 BILLION dollars worth of energy derivatives!! Sorry… but anybody who tells you there is not a HUGE speculative presence in this market is blowing smoke up your ass. Indeed… I would argue that the dot.com, real estate, and now oil boom… are all related, and that is was massive global and domestic capital flows, rolling from sector to sector, as each successively crashed and capital flowed to the next opportunity. All were driven initially but strong fundamentals, but each in turn got (or is) out of hand.

Anyway… my point is not that there is speculative excess. I've been saying that for a while. My point is that unlike the stock market, where policy makers and the public generally don't complain about speculative excess… indeed… they tend to like it... because everybody (the public basically) is making money. However… in energy products… especially now… the general public is really starting to suffer while a comparatively very few benefit from the run up. This complicates market action with the prospect of regulatory reform. Hillary Clinton has promised to look into commodity market participation. Yesterday on Bloomberg news I heard that a Congressional Committee is being formed to look into the role of speculation in higher energy prices. This is NOT the stock market. If participants in the commodity markets want to keep their little gig un-tampered with, they had better tread lightly from here on out. In fact… here's a better idea… start shorting the market. Commodity speculators for the most part, have the unique ability to play either side of the market with equal ease. It's not like shorting a stock or physical bond, where you have to go out and pay to borrow the security. It's simply a matter of picking up the phone or making a couple of keystrokes.

I'm not saying oil goes back to $50. I'm not saying there is no global demand story. I'm simply saying that a doubling of price in a single year and a 500% increase over five, constitutes a spike, and I don't think ANYBODY who has access to long-term commodity charts would argue with. So rather than wait for the rules of the game to change… permanently from without… embrace your bubble ness… take charge of your own future. Pop it yourselves and enjoy the ride back down. Just for a little while anyway.

May 14, 2008             A Quick Word On Markets

5:00 AM New York time. Heading out early on the water this morning so I'll be brief.  Dave Gilmore was banging on the keyboard a lot yesterday, as there seems to be an increasing effort from Treasury and Fed in jawboning the dollar higher. That includes hawkish inflation commentary from dissenting members (Fisher) of the Board of Governors. All I will say is their timing couldn't be better. I really wish I had an account right now so I could be on board. The trade is loaded up short dollars just as there seems to be official sanction for efforts to influence things the other way, and even some long-time dollar bears such as Jim Rogers are publicly saying the dollar is due for a bounce. While it may not be making much headway to the upside yet, it clearly does not want to move lower either. That's the first step. Find a market where there is a big position skew and which price action refuses to validate. It's the accident waiting to happen trade, my favorite kind. Gold, one of the key supporting ancillary markets, has already broken lower and washed a lot of length out. I could even see putting on a spread long gold, long the dollar if gold were to come back toward into the $820 - $840 support area and put in some kind of exhaustion/downside-failure behavior. So far the dollar support has not hurt crude oil or the products. There is tremendous momentum technically and emotionally behind the energy complex. One of my friend Jim's contacts told him over the last couple of days that Indian and Chinese refiners lifted their hedges and went long over the last couple of days… tossing in the towel themselves on this market. It's an interesting anecdotal tidbit of information which is merely indicative, and I don't have any more specifics than that, but I would suspect that the energy market has recently, or is now, squeezing out the last of the nay Sayers. The way I see it, the dollar has still not really convinced enough participants yet that a bona-fide rally is in the cards… but it will. We are looking at a six-month trade that will see a big corrective rally in the US currency and rally US equity markets, which will last through year-end, and reset the table in terms of positioning in time for 2009. At that point the position skews will have been corrected and a fresh two-way appraisal can be made. Oil will eventually succumb and I think a big break is in the cards. It would be fittingly ironic if oil put in a top around Memorial Day in the US… or the official start of the driving season.

May 12, 2008                     The Insanity of Predicting The Future

6:00 AM New York time. I've got a draft reply to a reader sitting in my email outbox. I've been thinking about it and tinkering with it over the weekend. Working on it got me thinking. Watching my little Sydney over the weekend got me thinking. Basically… what started this whole thing was a reader who sent me a link to an April article by John Williams that appeared on his Shadow Government Statistics web site. In summary, the piece forecasts that the US has begun an inflationary spiral and recession that will result in a hyperinflationary depression reminiscent of the Weimar Republic. Look… I'll be the first one to admit… I am no forecaster. And I am not about to argue with the statistics he uses for his prediction. Everybody has a right to their own opinion. Indeed, I have often been accused by readers of being a "weather vane"… twisting and turning my view with the frequency of a weather forecast. I can't argue with this description. I embrace it. I have repeatedly defended my methodology using actual weather data and forecasting success rates… short term versus long term. But this weekend I was thinking about economic stats.

When a child moves through high school, or college, and accumulates a grade point average, does that average truly reflect what that young person has gotten out of the experience? How it has changed and matured them? Or how they will use it through the balance of their lives? And when we look at the tremendous individuality among people and families around us, their varying financial situations, prospects for the future, ability to adapt, improvise, and move forward; I don't know about you… but I see infinite variation. And when we look at how news and rumor spread among a group of people, how a story can get distorted and blown out of proportion over just a few iterations of pass-along, is it not obvious how we can be driven by emotion, and how that emotion can swing 180 degrees in a very short period of time?

Economists for their part, take all that complexity, measure a tiny sample of it, then extrapolate those determinations across the broader population, a come up with a small group of numbers which they, along with policy-makers, and market watchers they use to gauge our future economic fortune on.

I don't know about you… but when I think about it that way… it seems insane to take ANY long-term forecast or conclusion with any more than a grain of salt… a single piece of sand on a beach. When I look at my two-year old daughter doing her flash cards of all 26 letters of the alphabet and numbers 0 through 9 flawlessly (sorry… had to stick that in), do I see a statistic? Do I see the future of this country… or the world? My point is this. People have often accused me of having an opinion swinging in the breeze, ready to be caught up by the next direction. But is tracking and trading against swings in market emotion any more insane than someone who believes in the gospel of economic statistics, which to me… seem as out of touch with our individual realities as we can get?

Taking this all back to the John Williams piece on hyperinflation and the 2nd Weimar Republic… a prediction written with such palpable confidence… as though the outcome can be none other. I'm not arguing against the prediction itself… again… everybody is entitled to their opinion. I argue against the arrogance of confidence… that the future can be none other. It would be the same argument I would use against any other form of dogma. The sheer audacity that we can take something so infinitely complex… driven so profoundly by emotion… with literally trillions of moving parts… and confidently crow that our prediction is THE right one… it boggles my mind. It is like the religious zealot who says with absolute surety that once we die our spiritual fate is thus and such. Knowing the unknowable with 100% confidence. Does that not sound insane to you? The high school drop out with a 2.0 GPA is destined to under achieve. Tell that to Bill Gates. Is economics any different? You take a bunch of essentially worthless statistics, manipulate them around a bit and come up with your own and very different conclusion from that which is generally accepted… but you're right and everybody else is wrong. Does that not sound insane?

Look… as I said… everybody is entitled to an opinion. But understand… the more dogmatic confidence you project in your own view of the future, the less I am likely to buy it. Wisdom is achieved when one embraces the fact that one knows nothing. Even Milton Friedman… made countless jokes about economists and economic forecasting. He would be the first one to admit how dismal the science is. THAT I can respect. Tell me with all your heart that you know exactly how the future will unfold and you've lost me. I say you've missed the point entirely. You have no sense of your place. You have no sense of how small you actually are, how infinitely complex the system is, and how many possible outcomes of the future there actually are. You pay no respect to the dynamism of the system; a system that is decidedly un-modelable. Where one force, through its own intensity, generates a counter-acting force… and so on… and so on.

Through it all… readers I'm sure, will STILL accuse me of having an opinion that flaps in the breeze… that swings around based on the perceived emotional skews that on can pick up through the press and the media. But the way I see it… that approach is infinitely more RATIONAL that someone who bases their long-term forecasts on some set of numbers that are nothing more than derivations of derivations of derivations, so much so that they have filtered out any semblance to real-life and its infinite complexity. Of course we can't model real life! That's why we created those numbers! So we can FEEL better that we actually know what's going on. So we can FEEL in control of our lives. Guess what? We know nothing. Anything can happen. That is the beauty. That is the mystery of life. That is why the future is so wide open. I guess that is my reply.

May 9, 2008                 Double Standard

5:00 AM New York time. I've gotten a good feel for big-bank bureaucracy over the last couple of months. Between making an FXA sale at Citibank and filling out the paperwork for the opening on the account I manage over there… whew… I gotta tell you… it's a NIGHTMARE. I think we had five people plus the three of us on a conference call to sew up the FX Analytics subscription agreement for just a handful of subscribers. Between lawyers, FX business management and market data people, we easily had more people on the phone negotiating than the number of users. And yesterday was the capper, when my friend Jim sent me the account papers to give him a hand with. Jeeze Louise… I think they wanted to know his income for the past 5 years, the name of his banker along with a signed affidavit of worth, a listing of all his assets, and the rights to his firstborn. For the record, when we opened the account at Bear it was zip… zip… zip… done. Then again… who's still in business? Have to think about that one for a minute. Still… I can see why SO many analysts rag on Citi for their stodginess. I seriously don't know how anything gets done over there and certainly not at least at great cost. It really does take four people to screw in a light bulb at that place. However… it does look like my account should be up and running by June.

Meanwhile… I remain of the same mindset as far as the markets. I actually find it fascinating that SO many people are SO insistent about saying the bull market in oil (and other commodities for that matter) is driven by fundamentals and not speculation. There is a fresh article in the Journal this morning saying that 51% of economists surveyed think the rise in commodity prices ARE justified by fundamentals. By the way… these are the same economists who said it was impossible for capital flows from emerging economy and oil exporting countries to be a prime factor in driving long rates down during the "conundrum" period of Fed tightening. I'm sorry people… but oil is up 100% in ONE YEAR!!! Please do NOT tell me that kind of move is normal… can't you even acknowledge that it might be a LITTLE outside the normal range of annual price movement? Demand growth in the US is actually negative on the year. It's funny how commodity bulls and dollar bears will be so quick to point out when the financial markets have reached excess, but can easily look the other way when markets THEY favor, behave in similar fashion. It just goes to show how we ALL tend to justify and rationalize our own positions, sacrificing our objectivity in the process… the classic double standard. The very participants who made a great call at the bottom and started getting bullish in beaten up commodities when the NASDAQ was poking at 5000, remain bullish even though the relative sentiment situations in each of those markets has COMPLETELY REVERSED. Does no one else see the irony in that? Fascinating. It also seems to me, (amazingly), that commentary is AS or MORE bullish than at any time during the whole run-up. My friend Jim tells me that open interest in the nearby $200 calls - 70 dollars away mind you - is 21,000 and that they are selling for 70 cents each. That's $700 for ONE option! 70 bucks out of the money! I have been a commodity bull for a long time but I gotta say again… this is NUTS!

All this just as the pain to consumers drives people to look for every avenue possible to scrimp and save on energy usage. I myself have cut down on unnecessary driving trips, replaced my incandescent bulbs with the new energy-savers, shortened my showers, and lowered the thermostats at home. You can't tell me that similar measures aren't being taken across the entire country and that such efforts in the country that consumes a full ¼ of the worlds energy won't make a difference.

Bottom line… I think the creation of ETF's and the explosion in value of assets run by hedge funds, as well as the entry of non-traditional participants, have made all manner of commodities available to the average investor… even to the institutional investor who may have in time past had only minimal participation. When CALPERS says they are going to up their commodity allocation… what is that SAYING? You cannot tell me that this has not had a huge impact on prices. You're talking about a huge change in the rules of the game… and anytime you have a major change in the rules, you usher in the possibility of large and unintended consequence. To me its obvious, in the same way that new financial products create a rush of buying interest and eventually a bubble, so too the same thing is happening in commodities… you can't tell me its NOT going to have an effect. I suspect a year from now, (or whenever), when the oil bubble finally bursts, and prices collapse from a mass exodus of capital, that only THEN will economists pay due to the role that this positive capital flow had in inflating prices. Of course, by the time you hear that from them, it will be too late to take advantage of, either in oil directly or in the ancillary markets that will be affected. But then… that IS the classic MO of the economist right… observe, analyze and comment on the fact that the horse has indeed left the barn, and such leaving will have profound effects on the economy… thanks.

May 7, 2008                 I've Grown To Dislike Republicans

6:00 AM New York time. Geeze Louise am I tired of the Republican mindset. I heard John McCain's comments on Russia yesterday. He wants to dis-invite them from the next G-8 meeting. I was livid… screaming at the radio. I was a little cranky yesterday. I guess he sees KGB written all over Vladimir Putin. So let me ask you John… do you think political progress moves in a straight line? Politics is another human group activity like markets. Trends may be in force but don't move in a straight line. What are you thinking?!! Have you learned NOTHING from Iraq or Afghanistan? Russia has made HUGE progress toward increased societal liberty since the fall of the Wall; I think they're entitled to a little correction. We are going to desperately need Russia in the years ahead. They are a huge producer of and have further huge potential toward the production of energy, metals and agriculture. There is not much of an ideological gap between their culture and ours. I am SO tired of our (the US) bellicose attitude toward anyone who disagrees with us, or doesn't progress politically according to OUR plan. That has been the hallmark of the past 7 years. It's like we've become the globally bully… threatening anyone who stands up to us or takes a different path. I have generally been a Republican voter through most of my professional life but I must tell you, they are driving me farther and farther away every week.

OK… enough of that. My liver has been vented. My close friends in the markets are all looking to use this latest break in gold and the Euro to get back in… long both. I have been told, if I really want to do something in my old account I can. Our broker there is going to be settling into a new home soon but the old account is still active if I NEED to make a trade. My friend Jim's sentiment indicators are all flashing overdone on the Euro and gold downsides. I'm not so sure I want to jump all over that one. As I have said… I want to see where we set the next major (significant) high in both those markets before I'm willing to say the trends are still unscathed. Gold is probably a safer bet because its recent down move has flushed a lot more speculative length out than the dollar. Dennis Gartman has said the gold bubble has burst. He represents a decent percentage of market participation. Of course if gold does move higher he'll come out magically one day and say he's long, but such is life.

I myself would need to see some kind of downside exhaustion failure of both these markets before I would call the recent move a mere correction and over. For right now… I'm still thinking the longer-term (through year-end) odds play favors counter-trend vulnerability, and I would favor selling a rally after some decent proportional correction. Oil is clearly a fly in the ointment. So long as oil continues to act the way it does, I don't think the majority of participants are going to be comfortable with a negative commodity bias and a positive dollar bias. The Goldman call yesterday for a "super spike" was certainly an interesting one. I have to say I take that with a grain of salt. Goldman makes its hay these days with prop trading. Nice gig actually… have all your traders long (or short) a given market… then come out and make one of your influential analytical calls driving prices in your trader's direction. At another point in time such activity might be considered market manipulation. What I would ask today is… do you think a lot of their guys were sellers yesterday… passing their strong-hands long positions over to weaker ones? On the other side of the oil story is the stock-market story. It has been trading remarkably well and provides some counter balance to the oil story. Weakness in either market could tip the balance of the dollar/commodity trade one way or the other.

I continue to take a more philosophical outlook on not having an account right now. I see increasing evidence from a behavioral standpoint that the dollar-debacle-credit-crisis-commodity-panic storyline is getting worn out. But I tend to be very early in my calls. This break is forcing me into a mode of patience, giving me a chance to observe and confirm far longer than I normally would. If I had an account I'd be busy spending money trying to jockey positions around to stay with that trade during its early, formative stages (a tough time). I have always considered it a six-month fuc*-you trade that could take us into year-end before washing out skewed positions and turning the analytical/economic community around, in the process screwing over a lot of people who have made easy money with that trade for several years now. Yes… I know my gold bug, dollar-bear readers (those few that are left) are shaking their heads at me right now. What can I say… I have to calls em' the way I sees em'. I really don't think you would want it any other way.

May 5, 2008                 Final Installment

6:00 AM New York time. The last couple of posts have dealt with mechanics of a psychological turn in the markets, how it begins to feed on itself, and how, even without a significant fundamental event, such turns often come as a result of their own weight on one side of a trade. In this final installment, I want to touch briefly on how that turn can build momentum, and how the whole concept of vulnerable trades can be a powerful market moving force. Wall Street is a very predatory environment. And, as in watching Bear Stearns implode over two or three days, I think it is obvious to all that fear is an even more powerful motivator that greed. Greed creeps up on you. Greed can drag you kicking and screaming into a position over a long course of time. Fear though… fear is the fight or flight response. Escape demands an instantaneous response. Get me out. Take the pain away. This is why bear conditions in traditionally long-only markets are so violent, and why corrective action generally in a trending market is sharp and vicious. For those why doubt the power of these various forces, let me tell you, I have sat in the seat and pulled the trigger on many a trade that generated panic. I worked for a couple of highly predatory funds in my tenure on Wall Street. I have seen the phenomenon first hand… in person. Louis Bacon was constantly on the prowl, both overtly and covertly for bad positions to trade against. I've relayed this story before but I'll do it again for first time readers: I was working on Quantum's trading desk at the time. George had been putting on big short bond position. It was getting late in the day and you could sense the market was wavering. George called in. "What's happening?" I gave him the lay of the land. After a quiet moment, he had me sell another big chunk of bond futures. His last words to me were …"well… somebody's got to do it". I started selling, the market broke, and we had a big up day for the fund. The next day, the WSJ discussed a battery of rational, fundamental reasons as to why bonds were weaker and yields were up the prior day. Total bullsh**, prices were down because we (and probably a bunch of others who saw the order flow) started selling en-masse. There were lots of weak longs out there just barely hanging on. We helped put them out of their misery. You cannot take part in such a real-time market experience and NOT have it leave an impression. For me, it was like a catharsis. The light went on. Sure… nowadays, the markets are much deeper, and only rarely will a single player be able to garner that much price impact. But the underlying phenomenon remains… despite the change in guise. Where one fund could do it 20 years ago, now it takes several. But if they come to the decision and execute around the same time, the effect can be identical. Why does technical analysis often work like a charm… because we're all looking at the same charts, and acting at the same "pivotal" price points. They are only pivotal because we make them so.

So here we are. The dollar has been down six years in a row. Its value against the Euro has been cut in half since the Euro's inception. The decline has caused a doubling or in some cases, tripling in the price of some globally fungible commodities. The decline has helped drive the stock market to big declines, US Treasury note and bill yields to new historic lows, and push the US economy into or very near to, recession. The Federal Reserve has sharply cut interest rates and one of Wall Street's major investment banks has fallen. The US real estate market remains in shambles. Sound terrible? It is. But… all of this is ALREADY widely known and has been acted on by participants. To those who advocate that things are just getting started or have much farther to go… I ask. What more do you want? Ask yourself (objectively) NOW whose being greedy?

One quick piece of anecdotal information; a friend of mine, who works for a big canvas/sail maker down in Fairfield County CT. told me yesterday that a lot of the big powerboats in the boat yards down their won't be going in this year. The yard managers are saying customers simply don't want to put them in the water as they have become too expensive to run. Many are for sale. So… there are positives to this recession thing after all.

May 2, 2008                 More Thoughts On Pure Observation

7:00 AM New York time. I want to follow-up on my Wednesday piece in regard to how I personally try to stay in a mode of true market objective observation. I'm simply going to ask a couple of questions along with why it's important to ask them. You can then determine for yourself what you think the odds are going forward for a move one way or another.

First… an ultra-simplistic look at what's been going on in the markets. The dollar has continued to gain strength this week, in spite of a continued perception that the US is in or heading toward recession, in spite of a yet another Fed rate cut. Commodities generally remain in retreat, stocks are doing better and credit spreads are tightening in many areas. A single major theme is out there right now supporting these moves. Proponents are saying that markets look 6 to 9 months out, and conditions on both Wall Street and Main Street will be greatly improved by year-end. This is a one-size-fits-all total bullsh** answer, that does nothing to help us determine what's next. Conversely… detractors of the current moves are saying that what we're seeing now is simply corrective action to the larger and still intact trends of a lower dollar, higher commodities and weaker financials… another bullsh** answer that does nothing to help us determine for ourselves whether this current contrarian move is something more permanent or not.

So… if I were trying to determine what's going to happen next, here's what I would ask:

Is there is a significant existing position skew among participants? This is a critical overlay question that goes to the very core of capital flow. Making money… generating a positive P&L, is central to the produce-nothing, zero-sum game which is the capital market trading game. Nobody likes to lose. This is the casino. No rationale, no matter how valid or logical, will hold up for long under the constant duress of relentless losses. P&L the ultimate arbiter. I have seen the most determined participant be forced to the exits despite the tremendous conviction in a trade or trade concept. Price moves in the capital markets require a flow of capital in the trend direction. And despite the tremendous volume… there is in fact a finite amount of that capital at work at any one time, along with a certain number of players operating at one time. So the longer a trend is in force, the more capital and the more players, have already committed to that trade. With each day and week of continuation… the more one-sided that pool of capital gets. So conversely, each day also increases the vulnerability of that trade to a contrary reaction. And while YOU AS READER may not utilize leverage, and you may have a long-term time frame, you must understand that a great many participants DO utilize leverage, and their time frames run the gamut of a couple of hours to a couple of years. And we're talking about trillions of dollars of managed capital at work here! The actions of hedge funds, insurance companies, pension funds, mutual funds, endowments and high net-worth individuals are all part of this system. And in a large number of these cases, managers either get paid on a quarterly or annual basis. So regardless of when their particular fiscal year ends, or their longer term macro views… their P&L time frames for the most part are going to be less than a year. Understand that we are talking about performance-based pay that will determine the earnings of individuals for the year. Do not underestimate the power that this will play in the confidence or lack thereof with these individuals. Notice we have said nothing about the economy. Many in the capital markets would have you believe that economics drives all this stuff. Yeah… that's true… it's just not the economics most of us think about. The true economics is that of managers and their own desire to maximize both management and incentive fees. THAT IS THE BOTTOM LINE!!!

Next comes price action and reaction to news. Simply ask yourself if price action is putting pressure on those supporting the prevailing trend or not. This is very simple stuff. It's all very basic… guttural… primordial… the ability of the dominant clan members to bring food back to the cave. In the capital markets… accounts get settled up at the end of every day. How do you feel when you total up your results for the day and you've had a bad one? Sucks don't it? And when you have two in a row? And three? If the contrarian move closes day after day on the highs… you've got to know that it is slowly eating at those who have been supporting the trend. Conversely… if the contrarian rally fails… if it turns around and closes on its lows, how do you feel? Whew? Yup… been there too. Think of the people trading crude oil. Yesterday at one point we were testing 110. In the end it held and closed almost just slightly lower. Bulls breathed a sigh of relief and bears cursed. Almost had it down $3 for another day. The energy markets are a great example because they are so extreme. It's almost as if you can "feel" the battle getting played out day after day. Thousands of participants trying to take money away from a different thousand participants. Good days and bad days. Despair and elation. Buying a round or crying in your beer. I'm running out of time so I'll leave it here for today. My only advice is to encourage you to continually try and elevate yourself above the emotion. It's not about what YOU think. It's about what the markets DO. If you feel that recent contrarian moves have given you an opportunity to get back in, or get in bigger, then great. If you support recent contrarian moves… then hot-diggity for you too. I simply suggest keeping your finger on the pulse… every day. Trends ebb and flow as storylines mature and die… making way for new ones. Does today support the latter… or the former?

April 30, 2008                 I Am A Moth

6:00 AM New York time. I have been getting some reader email lately. It has generally been trying to convince me that the credit/dollar/housing/food/energy crisis is still unfolding. The two Daves at FXA are saying the same thing. So basically… I've been the odd man out in terms of predicting where the economy and markets are headed. All have a battery of very good reasons why things will get worse. They still have not convinced me. For my part… and not unexpectedly so… my arguments have done little to change their minds either. That's the way it should be. As I have said many times in the past… there are thousands of different reasons to have or not-have, positions in the markets, but there are in fact only three choices in the end… long, short, or out. And the reality is… while we all are each convinced of our own logical rationale, data and information sources… for whatever position we have… we are all trying to foretell the future of an infinitely complex system. The outcome can have an infinite number of permutations. The guy who flips the coin has just as much a chance of being right as the Nobel Laureate PhD economist. And frequently… as is our human nature… the more other people try to convince us of their views… the more they can actually drive us toward the opposing view. It's the human condition. Its how we're wired. I have a two-year old at home. That phenomenon is on display everyday without all the veiling complexities that adulthood brings on. If I say yes she says no. The best way to get her to do things I want is to tell her she can't. And frequently, the more our view comes under pressure, the more defensive we get about maintaining it… searching ever farther and wider for reasons to stick with it.

After years of struggling in the markets and later… down on the oyster farm… I have gradually developed my own philosophy of objective contrarianism to combat this effect. Essentially… when making decisions on which course to follow, I try to free my mind of all my preconceptions; revert to pure objective current observation. Embrace the concept that I know nothing. Watch the evolution of events and adjust behavior and reactions accordingly. Be accepting of change and be willing to move in that direction as the realization of what is happening grows. Experience is valuable but complex systems are dynamic. Understand that change is fundamental to our life condition.

Right now, in the financial markets, I see and hear some of the most bearish opinion on the outlook for the US economy and markets I have heard in some years. At the same time… I see market price action that is increasingly not validating those views. THAT OBSERVATION IS ALL I NEED TO SEE. Markets are about odds. It's not about economics… its about odds. It's poker. Around the poker table… players wear dark glasses and keep stone faces. THEY know it's not about the cards. Its how they PLAY the cards. The worst thing they can do is to reveal their hand. In the markets it seems… there is no lack of participants who wear their views (and consequently their positions) on their sleeves. Of the two readers who have emailed me this week, and the two Daves I work with, all think stocks and the dollar will make new lows. Maybe they will. But lately prices have been moving the other direction. If the four people I've had my most recent market conversations with all have the same view… then perhaps that is representative of the participant base as a whole. Hmmm… lets see… lots of US dollar and capital market bearishness out there and not a lot of confirmation… if not outright contradiction… from the price action. Can you see why at this point I could care less about the fundamental rationale for the bearishness?? IT'S NO LONGER ABOUT THE FUNDAMENTAL RATIONALE! It's lots of people with the same trade on, or, in the case of stocks, lots of people having no trade on.

We will get a decision from the Fed today. My bet is that the slow shift in sentiment will continue. My bet is that, just as buyers fled the credit markets in panic so too they can drift back in as the lure of higher yields and appetite for risk slowly comes back. The tremendous skew in sentiment and positioning that exists needs ever more capital flow to maintain itself. The ebbing of that flow will be apparent in price behavior over the next couple of days and weeks. It's a big cycle of emotion. If I am right… buyers will come into the dollar and stocks regardless of what the Fed does today and what Payrolls print on Friday. Dips on bearish news will not sustain and bullish news will be accentuated. The cards are dealt, the players are ready… its time to start revealing each of our hands. All I know is… I am a moth. Is that a light starting to glow in the distance?

April 28, 2008                 Finally… Evidence On The Local Level

6:00 AM New York time. Finally after months of trying to find economic evidence that I can put my own fingers on in terms of the economy turning sour… I have one. The bank where my wife works is reducing certain customer home equity lines because of reduced valuation in the underlying asset. It is the FIRST piece of evidence on the grass roots local level for me that supports the spreading of the credit concern contagion. For the record… my wife's bank, and all our other local banks, for that matter, stayed away form any loans even close to sub prime. I'm a bit gratified actually. For a while there I was wondering if the methodology that had served me so well over the past years was breaking down.

I made some changes last week to my long-term retirement account. I moved some money into an ETF that follows the Dollar Index as well as the financial stocks, and took some money out of an oil-shares ETF that I was long. My time horizon is not 3 to 6 months as in my trading account; it's a couple of years. Go ahead… go ahead… have a good laugh. I really don't give a sh**. In fact… I'm so tired of defending myself against people who think the US is coming apart at the seams… I simply don't care anymore! Mind you… this is not for my speculative trading account… this is my retirement account. Honestly… I finding some of the current argumentation against the dollar and the US has gotten SO ludicrous; it's hard to believe I actually found myself in the same market view camp as some of these people.

Right up there among these ideas is the one that the Euro is going to be the world's next reserve currency and the countries of the EU are the only ones holding the line on monetary restraint. Tell you what folks… I don't really care that the Euro eventually becomes the next world reserve currency. Good luck to them. The fact is, a Euro at 1.60 is KILLING European exporters! Lots of financial market types over the past couple of months have touted the EU as moving in a more free market direction, while the US has moved in a more socialist direction. OK… sure. A couple of months ago I spoke to some people knowledgeable about exporting into the EU. I was thinking it made sense to look into selling my oysters into the EU… to take advantage of the exchange rate diff. HA… good luck! You want to talk about bureaucracy! Jeeze Louise… I've got a better chance of having Christ drop in for a cup of coffee than I do selling farmed seafood into that market. Talk about protectionism and barriers to free trade!! It's just the kind of bearish dollar argument you would here from someone who has never PRODUCED anything to export to Europe and so has certainly never TRIED!!!

As far as monetary restraint… that may be true right here, and right now… this second. But two years from now… who knows. Fact is, it wasn't that many years ago that much of Europe was a financial basket case… Italy was going through more Prime Ministers than paper towels and the social safely net in France was in tatters. Why only last summer we had rioting in the streets of Paris. When's the last time you saw rioting in a US city? Oh… that's right… the rioting is yet to come. The point I'm trying to make is that Europe is no financial market panacea either. If you want to get bullish on a currency vis-à-vis the dollar, at least find me one that I can truly get my teeth into and believe in. Japan…? Please. China… tightly controlled. Korea… hmmm… there's a possibility. Australia… that I could believe. Financial markets are finicky. Two analysts can take the same statistical release and argue bull and bear cases from it. What I really care about are real financial flows. When Europeans are looking to the US for business opportunity… that's the real indicator. When US tourists stay away from European vacations… that's for real. Today's darling is tomorrows dog. And the sad reality is… the people I associate with and talk to (as well as the financial press) have DRIVEN me to this point. If you just weren't SO adamant… pulling rationale from every dark orifice of your body… I might still be on the dollar-bear-gravy train.

And while were on the subject of big cycles and long-term perceptions, I saw a show produced by Nature last night. They were talking about the Antarctic ice sheets melting. And they were saying that in spite of this, research has shown that the accumulated snow pack in the Antarctic interior was actually increasing, and temperatures were actually falling. I found this very interesting. My oil-trading friend Jim uses a climatologist who has a similarly interesting view. His theory is that the Antarctic ocean currents are the key driver in global warming and cooling, and that those currents are already beginning to cool off. This has led him to the view that right now we are at the highs in global temp, and that we are soon to (if we haven't already) begun the long slide down the back side. If that's true, 10 years from now many of us might be looking back fondly at milder winters and longer autumns, as we sit shivering in our jamees. Have a nice day.

April 25, 2008                 Seeing The Light or… Significant Events

6:30 AM New York time. I do not generally comment on things that are being heavily covered by the media already. But I'm going to make an exception this time. I also wish to make the following disclaimer. I… Stephen Plant, still remain very friendly to the commodity sector generally. I think those individuals and companies who produce quality goods or goods of necessity in the United States (or abroad for that matter) face a bright future. The fact that the US economy remains dominated by services will keep quality products of need in demand for the balance of my lifetime. HOWEVER… I have no love lost for speculators (and I myself am frequently one) who seek to profit from the general rise in price in goods of necessity when their only connection to those goods is the ability to pronounce them correctly and put up some margin money… especially when it starts to cost ME four bucks to put a gallon of gas in the tank! AND… there ARE times when the hype surrounding the bigger trend has simply gone too far. When even the major price trend has to roll over and wash out some excess. You cannot tell me that news of Costco limiting purchases of rice, does not hint at the same or greater excess in emotion than someone putting up a spec house 3 years ago who said real estate would never come down. But are equally caught up in the fever of the moment. And I also have to say to those commodity bulls who remain JUST as enthusiastic as on day-one 8 years ago, when the whole commodity deflation cycle ended… you are simply not being objective.

When I worked for George… he was always on the lookout for what he called "significant events". Major fundamental turning points, brought on as a reaction to market stress, that simply snapped the camels back so to speak, and cause a price reaction in a contrary direction that could last months or even years. Between the peak-emotion news of Costco and rice rationing and the Federal Reserve starting to wake up and smell the dollar crisis… I think we may indeed have a significant event on our hands.

Fueling this view is the belief that our Federal Reserve… led by a pure academic… a novice in the "true" workings of the financial markets… HAS FINALLY STARTED TO SEE THE LIGHT, and has begun to realize that far greater bang for the buck will be achieved by stabilizing (or strengthening) the dollar than lowering interest rates another notch. It is my view that this whole crisis is more one of systemic loss of confidence rather than a true precarious financial situation for a large majority of Americans. And while there are certainly a large (compared to other times in history) number of people in bad mortgages with negative equity, this group still remains a very small percentage of the whole population. The washout that this group will suffer is a necessary and normal correction to one of our periodic real estate manias.

The default rate on total mortgage debt has indeed doubled… from 1.5% to 3%. But that is still a small percentage of the entire mortgage population. Did many banks and hedge funds retain the paper behind the riskier mortgage market segments… sure? Did many of them leverage these securities many times… sure? And just like the junk bond craze of the eighties, will many of these funds go under and may many of the banks suffer greatly… all for a few extra basis points in yield… tsk… tsk… tsk. But as Drexel Burnham Lambert was the poster child of excess in its day… so too will Bear Stearns be the poster child of our day.

Key in all this will be the Fed. If Bernanke and company have truly come to the conclusion that they are in fact pushing on a string, and that excess liquidity is actually a cause of many of our problems rather than a cure, then and only then can confidence finally start to return to the dollar and the paper asset markets. And if money starts to flow for real away from commodities… then I would caution that there are a great many positions in those markets that will need to come off. And trying to get OUT of some of these markets will be a great deal harder to accomplish than is was getting in.

So while Warren Buffet may be looking at Europe for investment opportunities… on the view that the dollar will be lower still even years after making his investments… I ask the question… you can live anywhere in the world… why are you still living in the US?

April 23, 2008                 Denial… Ain't No River In Egypt

6:30 AM New York time. Dave Gilmore and I went in for an FXA visit yesterday. What did we hear from customers and prospects? You guessed it… gloom and doom. The cumulative view was that: 1) Real estate inventories are going to continue to pile up, falling or stagnating in value, even if ownership is transferred to stronger hands. 2) Banks have further write-downs to go, much of which is not even on the market's radar screen yet. 3) Energy (and other staple commodity) prices are going to continue climbing, pressuring consumers who are already struggling with maxed-out debt loads. 4) Even parts of the country that have so far escaped damage (such as those from where I obviously derive much of my anecdotal evidence) will eventually be caught up in the downturn, which has much farther to run and will eventually turn out to be one of our country's MAJOR recessions. 5) Europe will not escape (whatever THAT means for the dollar) and is already starting to see down-turns in many countries including Spain and Italy. We even heard a rumor while we were there that Costco, the big warehouse retailer, was limiting rice purchases by customers due to shortages. And this morning, on Yahoo news, there's an ABC news piece about the epidemic in copper theft that is going on in this country. Some brave and desperate souls, it seems, are even pirating copper from live transmission lines for its scrap value. So there you have it. For those of you forecasting the long-term decline of the American Empire I'm sure its music to your ears. For myself… I was arguing all day that such extremes in negativity are historically times to call a turn. But in the end, with the Euro making a new 6-year (or whatever it is) high on the day, and oil poking up to $120, I was STILL glad I didn't have an active trading account to get myself in trouble with.

And speaking of shortages… I was thinking about the grocery store the last few days. I do most of the food shopping for my household so I notice prices in the store as they jump around from week to week, season to season. And one of the things I notice is that prices are generally stable… unless there is a shortage. Clemetines (those little tangerine-like fruits that come from Spain, though with the Euro where it is, most of the ones I saw this year were from California) were around this year, but never in big quantity, so a box of them ran about $9 each all year. That's a lot compared to most years when there is typically a big supply in the spring and prices come down by half as stores promote them to move the inventory. Conversely… the shortage of strawberries I was hearing about early this year has not materialized… so strawberries, much to my daughters delight, have been on special for the last three weeks now. What's the point? While there is great seasonality is produce availability from season to season, you really need a "shortage" to see a significant (doubling lets say…) rise in prices.

So as a plethora of academics, economists and policy makers debate the role of speculation in driving commodity prices higher (yet another study is underway right now in the Chicago grain futures), I ask myself; self… how is it possible that prices in such a fungible commodity as petroleum, can double over the past 12 months WITHOUT a shortage? Throughout the past year, inventories have been ample. The answer, as my grocery store analogy illustrates, is they can't… unless there is an added ingredient… speculation. So I find it very odd that "experts" have such a hard time believing, or in many cases, refuse to believe, that speculation has a big role in driving tradable commodities higher when there seems so much obvious evidence to the contrary. Some of the brightest minds in the world had the hardest time swallowing the idea that Mr. Greenspan's "conundrum" was in fact caused by an excess of savings-flush-export-country dollar reserves in an environment of rising short rates, and that flow of capital could actually drive market-determined long rates lower while the central bank was actually tightening short rates. That phenomenon, years after the fact, is now the accepted view. So why is it such a stretch now to believe that the same thing can happen in much smaller commodity markets in a much more turbulent economic period? I'm NOT saying speculative participation is bad. I AM saying that it CAN and lately, DOES play a significant role. The problem is that, while the ability to participate in and take advantage of markets requires free movement of capital, and is fundamental to our American capitalist economic system… it sometimes (as is happening in oil) results in capital market price movements that run contrary to the "public good", and drives prices to the point where consumers cry foul. So policy-makers and regulators tend to react to this classic dichotomy of purpose with yet another classic human trait… denial. It's the dirty little secret we need to acknowledge and move on.

Meanwhile… in my world, one of my oyster customers bumped up their order for the second week in a row, in what is typically a slow time of the year (though demand normally starts back up as the weather heats up), and I heard from another old customer (who I hadn't heard from in some time) asking if she could start getting stuff every week again. Once again… clearly MY level and trend of sales activity is not coincident with others… even if one might ASSUME that oysters were a luxury item and thus highly discretionary.

April 21, 2008                 Something's Gotta Give

6:30 AM New York time. If I were simply watching market action from Friday from a contrarian perspective, without looking at the news, my pure observation would be that stocks, and perhaps the dollar too, act pretty damn well, and are far more vulnerable to a reaction move higher than a trend continuation move lower. But… if I were to formulate my view by reading the financial news this morning, I wouldn't touch either market with a ten-foot pole. Folks… that's been the rub for me all along… the tremendous disconnects… the wide gap of opinion between bulls and bears. I regularly get from readers a variety of source information… all well thought out and very persuasive. I'm afraid I have to take it all with a grain of salt. Or even ignore it completely. We are in one of those times where I think the most important thing to do is form your own opinion… and place bets that work for you… without fear that you might be going against the grain of conventional wisdom.

I think in this cycle downturn, the news is exceptionally bad. The current credit crisis originated on Wall Street, so in covering its development, the financial media has painted a particularly gloomy picture. This makes sense… the primary source for the financial media is Wall Street. What do you think the market outlook is from a Bear Stearns equity strategist? This morning is yet another example. National City is trying to raise cash. A follow-up on the piece talks about how many smaller regional banks are now starting to suffer from mortgage woes as well. The latest survey from the National Association of Business Economics says a majority of companies now expect lower sales and profits, along with higher prices for materials. Gloom, gloom, gloom. OK… I am not going to argue with any of this information. All I'm saying is that price action has to corroborate this information in order for it to have value.

We are at a critical technical point for equities. If I look at the daily futures charts of the three major equity indices, I have to say, a case can be made in both the Dow and the NASDAQ that prices have broken out to the upside. The S&P is almost there, but there are still a couple of minor highs above that need to be taken out. A couple of weeks ago… as I was trying to get my head together… waiting for my account issues to get straightened out, I said I was going to let price action determine what my future bias was going to be. I said I was looking to see what both critical markets… stocks and the dollar… would do next… higher highs or lower lows. Well? Looks to me like stocks anyway… are in process of making those higher highs. And I think when one looks at the price action that ensued in other markets on a strong up day in equities such as we had on Friday, it is obvious what the potential is if stocks were to start recovering on a "perceived" more permanent basis.

Am I advocating jumping in right here? Of course not. But I think stocks are improving their case for buying on dips. The down days of late have been shallow and some of the rallies quite robust. We have been getting into a pattern of lower openings and higher closes. Volatility is slowly coming off. This is wall of worry stuff and from my experience, very positive action. And if stocks can slowly convince participants that they have put a bottom in, how long will it be before participants start to infer the same fate for the dollar? And… as I have said all along… what happens to commodities on a slow shift back in favor of equity markets and the US dollar? A shift in capital back toward financial markets and the dollar would put a huge crimp in the speculative component of the commodity markets.

I am still unable to act on any of these ideas. But that problem is going to be resolved one way or another by the end of the month. Perhaps the forced hiatus will be just what I need to give the markets some additional time to settle out and confirm.

April 16, 2008                 Making The Most Of It

6:30 AM New York time. Dave Lewis' last couple of posts have given me a bit to think about. And while I generally agree that the US has been lacking in major societal advancements over the past 20 years, as great societies are expected to, (for one… I see development of the Internet as a HUGE and world-changing invention… and largely the creation of American technology), I do agree that accomplishments in the last few decades have been primarily entertainment based rather than survival-based needs. And right now the world is finding itself a bit short of survival-based needs. The other thing that I would say is that we humans are crisis motivated… real change only comes about as a result of great stress on the system. The more stress our current situation leads to, the more ensuing change we can expect. We don't change much nor should we be expected to when times are comfortable.

I for one think it's high time we had a shake-up. I have said many times in this column that Americans would in the end be better off as a society if we had a reordering of priorities. If it takes a crisis situation to bring that about, then so be it. The best thing the United States can start to contribute to right now… is a better way to live. As the trend in basic living costs continue to increase, especially if the underlying economy continues to soften, it will become painfully obvious that a great many "things" we own and posses are really liabilities and not assets. Everything possession you have is either something you have to pay for, maintain, keep an eye on, insure, or put fuel in. The more costs go up, the more the cumulative burden of your possessions will weigh on your finances. The deeper the US goes into recession, the more Americans are going to come to realize that toys are also liabilities. A reduction in consumption, while it will have serious short-term negatives for jobs and earnings will ultimately wean us off of our dual-income, 60-hour work-week with 24-hour on call lifestyle. That's the lifestyle many of us have accepted in order to have all these "things". As the change is forced upon us, we may finally be able to realize the initial goal of all our increased technology… flexibility and freeing up of both time and location from which to live.

For example… ultimately, it may take $5 a gallon gasoline to finally push employers to make greater use of tele commuting. In my home state, the I-95 highway between New Haven and Greenwich is bumper to bumper from 7:30 to 9:30 every morning. If companies allowed their office staff to work 2 days a week from home, aggregate traffic could be cut by 30%. Imagine the savings in money, fuel, and aggravation. The only hurdles standing in the way are employers who feel that employees, without the watchful eye of a supervisor, will be goldbricking most of the day. Having more employees in results and goal-based jobs (which make sense anyway) would make this issue a moot point. We need to realize that bigger better faster does not equate to happier. And in the end, we may find that a slightly reduced standard of living has its upsides. More time to spend with family and friends, less worry about paying for this or that, a cleaner environment. A reduced consumption lifestyle is complete harmony with a greener lifestyle. The point is, one way or the other, the US is going to have to accept, in aggregate, a lower standard of living. The long days of consuming more than we produce and borrowing to finance the gap may be drawing to a close. It will be a time of considerable pain. But it can also be a time of great liberation for those who embrace the change. I say we might as well make the most of it.

April 14, 2008                     No Title

6:30 AM New York time. Spring in the US Northeast has finally sprung. Things are getting greener every day. I have to admit, getting outside and doing some chores around the house over the weekend was a tremendous competitive distraction to thinking about financial markets. Not trading doesn't help. So once again I'm sitting here wondering what to say and asking myself why (on certain days) I bother.

Obviously stocks and the dollar got whacked again on Friday. There was follow-through in Asia and it is building in Europe. All I will say is this; stocks have now rolled over from the upper end of their trading range. The upcoming retest will be key. Will they put in a higher low or a lower low? The same question goes for the dollar. There was modest negative news reported over the weekend. G-7 has no plans for anything. And what could they do anyway? They are powerless to stem the dollar's decline. Wachovia is getting a cash infusion and food riots breaking out in some of the world's poorer countries.

Commodities have turned much more of a mixed bag with the currencies turning more rangy lately. Energy markets continue to attract capital and print fresh records but many others are well off their highs with a great deal of work to do to get back up there. The list of those commodities that continue to print new highs is shrinking. Everything hinges on global equities and the currencies. I have no prediction. Lets just see what capital flow wants to do and from that, what price action tells us.

It's a good day for an aside so I'll relay a quick one. The World Wildlife Fund was invited to address the recent National Shellfish Association convention in Providence. Despite the fact that shellfish farming generally represents some of the best in sustainable, organic and low impact agri/aqua culture methodology on the planet, the WWF still has serious concerns about impact from shellfish farming on the environment. What was funny about some of their argument was… it makes you wonder if any of them read the paper or look at the news. World food and energy prices are skyrocketing. Global demographics and aggregate wealth have finally reached a point where we humans are outpacing even our high-tech/high-yield methods. So it's like watching someone sternly lecture and wag their finger at what is basically an insignificant corner of the world food-producing machine, while behind them, a huge tsunami of potential crisis is cresting and about to crash down on them. They are oblivious to how serious our global food situation has become. They're still playing the game as if we have the luxury of increasing the regulatory burden on food producers. And perhaps in America we still think we do. That is a huge mistake. But even here the tide is starting to turn. How many people do you think are going to worry about saving a snail darter when it costs 60 bucks to fill the tank of a sub-compact and a family of 4 spends $300/week at the grocery store?

April 11, 2008                 OK… OK… I'm Negative, I'm Negative!

6:30 AM New York time. OK… OK… stick to gloom and doom. Right. Consumer Confidence fell to new all-time lows yesterday, as far back as the series goes. That's the RBC Cash Index, not the Conference Board or U Mich. But I'm sure they'll be hideous too. The US Trade Deficit grew unexpectedly despite the weaker dollar. Damn… now we have the worst of both worlds. We also have new (or close to) all-time highs in heating oil, crude and gasoline prices. President Bush's approval rating also sunk to an all-time low.  There's also a survey of economists in the Journal saying the economy has farther to fall.

Things are just as bad on the anecdotal news front. One of my fellow Co-Op members has to find a new place to live. He and his wife are downsizing. He has worked for the State of CT for about 30 years and since they never had kids, life up until now has been about travel, good food and growing HIS oyster farm. He plans on splitting his impending day-job retirement/oyster-farming time between the place he's currently building in Costa Rica and here in CT. So his idea was to sell his lovely little place in Stonington Borough and buy something a bit smaller and cheaper in the surrounding locale. Unfortunately, his house sold so fast, (he's already under contract), he really needs to find something ASAP. Poor guy. It would be tight… but I'm thinking of offering him the option of staying with us for a while until things straighten out for him. And I never even new his old place was for sale.

I'm freaking out about heating oil prices too! They're going through the roof. I was on pins and needles yesterday and last night listening for the furnace to kick on. Fortunately it never did. Luckily… we hit 70 degrees outside yesterday… so between that and the sunshine streaming in all day, the house stayed at 72 through the night. Whewww!

Oh yeah… did I tell you our oysters didn't win the annual Natl. Shellfish Assn. taste-off on Monday. Final results show we took fifth out of 19. Top score of 129 went to some beautiful stuff from Duxbury, MA. 170 was the highest possible score. We got 120 points. Sure… we took top honors for best aftertaste… big deal… who cares about aftertaste anyway? Life sucks!

April 9, 2008         Goin' To New Jersey

7:00 AM New York time. Gilmore forwarded me an email piece yesterday from one of his contacts. It originated at a small boutique research/brokerage shop, and since I'm not sure what their deal is with the person Gilmore got the piece from… they shall remain nameless. It was a piece about the growing foreclosure problem… and the explosion in legal claims one way or the other. It was about judges who were stepping in on cases creating legal precedent in ways that (the writer says) will have profound impacts on the entire lending and mortgage securitization process. It was a lengthy piece containing examples of absurdly predatory lending practices and fraud… both ways. The gist was that the problem is still growing, and that legal issues of ownership and debt obligation between borrowers, lenders and the ultimate owners of the paper, are increasingly being decided in the courts by judges who are using their OWN legal and very divergent criteria. What impressed me most about the piece was its passion. It was witty, entertaining, biting and sarcastic… all the hallmarks of someone with a strong and determined view… very convincing. It reminded me of the occasional post I used to do and be all excited about, the kind where you have to keep yourself from typing on and on. It was a piece I would have been proud of. I can't remember the last time I wrote one that made me feel like that. When I started writing this blog years ago with Dave Lewis I put up a lot of pieces that made me feel that way. What keeps me going lately is my hope that, at some point, the feeling and passion for a view will return. Once again I will be attracting readers instead of slowly having them drift away. Such is life.

I should go to New Jersey. It seems like New Jersey keeps popping up as one of those States with many fine examples of the easy-money-lending/pipe-dream-home-appreciation foreclosure cases that are making news. It's a state that's not a speculative market like Miami, San Diego or Las Vegas, but dependent enough on Wall Street salaries to have pushed home prices during the boom into the stratosphere. It's not the city and it's not rural. It seems like a good place to go to get a true flavor for the mortgage crises that has spawned so much divergence of opinion on where the economy is going. It certainly ain't my neck of the woods. The anecdotal stuff from my neck of the woods still comes in slow, but I could read the local paper for a week and not see a foreclosure horror story. I actually see a decent amount of movement in homes that go up for sale around here. From sign counts there doesn't seem to be much of an over-supply. My anecdotal business sources… some of which have been intensely reliable in downturns past… seem to be doing fine. Believe me... I love a good gloom and doom story as much as the next guy. I WANT to believe… it's just hard to really buy-in when I don't see it with my own eyes. I have spent years trying to get myself to question and be skeptical of what I read in the paper in favor of personal observation. Some of my fixed web pages speak directly to the phenomenon of press as bottom of the information food chain. The last thing I want to do is have to go back and change all that stuff.

Gilmore keeps telling me I don't see the bad news personally because it hasn't GOTTEN really bad yet… but it will. So here I am, observing an economy probing the lower end of its historical operational range, being told by many sources that I respect greatly, some of who NEVER find themselves in agreement, that we are going lower still. It does not surprise me that CNBC or the Wall Street Journal are pumping out the gloom and doom. Look at their primary source pool. It's the same investment and commercial banks that find themselves writing down piles of paper nobody seems to want right now. And if one takes certain statistics out of context… it is in fact quite easy to work oneself into a lather and start running around waiting for the sky to fall. Delinquencies HAVE doubled on a year-on-year basis. The problem as I see it is that they are now running at 1.5% of all mortgages from 0.7%. Is 1.5% a number to get really worked up about? I pay a 2% thru-put to the Co-Op every time I sell an oyster, and I gotta tell you… I don't really notice it when I the bookkeeper writes me a check. And maybe that rate goes higher still. Perhaps we reach 2% before the year is out. The question STILL will be… is 2% really worth getting MORE negative, when we are already scraping along the bottom in so many measures of market sentiment? If I could just get the skeptical/contrarian side of me to shut up, things would be so much easier. So here I am… plodding through another day without passion for my piece… torn between what I see and hear and what I read and am being told. To top it all off our "Mystic" oysters didn't win the annual National Shellfish Association taste-off competition recently held in Providence. What's life coming to?

April 7, 2008                 Is That A Wall of Worry Up Ahead?

6:15 AM New York time. This morning I'm simply going to make a few simple observations. For one… the S&P 500 futures continue to trade at the upper end of their recent ranges. They are within easy striking distance of their late Feb high and just above that is the February 1 high. Both of these are significant reaction/retracement highs. There are also a couple of significant lows, one from mid-November and one from mid-August, which come in overhead at around 1430 and 1410 respectively.

There remains a great deal of nervousness over the outlook for stocks. While credit concerns seem to be abating somewhat, the economy is clearly slipping. Daily volatility continues to come off. Friday's lack of concern over weak Payrolls is potentially interesting.

As bearish as one wants to be on the US economy, the dollar, and her too big to fail policies more akin to a welfare state that the world's preeminent capitalist economy - one has to acknowledge that markets don't move in a straight line.

While I would certainly NOT advocate buying stocks at these levels, I submit that we have all the ingredients in place for the slow building of a wall of worry grinding rally in stocks. To validate the current bearish trend stocks need to fail somewhere amongst or below the aforementioned technical points. So far, they have managed to hold in.

Stocks remain one of, if not THE primary catalyst market among all the major capital markets. IF… and that's a big if… they are able to continue grinding higher, and take out some of these significant technical points, they will greatly strengthen their case that the worst in the US economy and credit markets has been discounted. The implications for ALL OTHER MARKETS will be significant. That raises the possible that stability in stocks could even temporarily generate stability in the US Dollar.

I am not trading right now, so my opinion should remain in the category of casual observer. And while I would be a seller up at these levels, it would be because the risk reward is low, and I could stop myself out and be wrong within a relatively short distance of my entry. Considering myself among many others in the markets who see the same thing, I think it is obvious what could happen if stocks continue to work higher.

April 4, 2008                 Fade Payrolls Either Way

6:15 AM New York time. I talked to my Bear guys again yesterday. What was only going to take a couple of weeks to resolve looks like (according to them) like another month. Hmmm…. from a couple of weeks three weeks ago, to another month as of yesterday. This doesn't smell good. We (FXA) just got through wrapping up a subscription deal with another large bank. The entire process started back in June of 07. Between FX business management and legal… the whole thing took 10 months. One would think it would be in JPM's best interest to resolve the Bear situation quickly. Even if they don't want the FCM part, the more accounts they can hold on to the more valuable the franchise. They are also still responsible for salaries of all those redundant back office personnel. Still… the wheels of corporate banking grind exceeding slow. Throw in a bunch of lawyers and who knows how long this will take. In the meanwhile… while I want to stick with my group… I'm not going to have much of a choice soon if I want to trade this quarter.

Fortunately, I still don't see anything imperative to do. Both catalyst markets (stocks and the dollar) remain in recent ranges. Stocks are at the upper boundary right now. As I see it, three significant points of resistance remain just above current levels in the June S&P futures; the late February high of 1392 (or there about), the February 1 high of 1400, and the early January low of 1392. More than a few analysts are getting up the courage to say a bottom is in. But until we take out these key technical points, the market won't have shown me anything different. The June Dollar Index is in an even more obvious intermediate triangle going back to early March. I am not going to try and anticipate anything. Give me a break one-way or another and I'll take it from there.

Commodities too have settled into some potentially wide-ranging trading affairs. Crude oil looks like it could be doing a re-do of its 07/08 3-month sideways affair. Gold has put a lot of room between current prices and recent highs. That will certainly increase the pool of seller wanna-bees on rallies. The only market I watch that seems unconcerned is corn. I was a little surprised the USDA didn't report a larger acreage number but it looks like most of that was directed to beans. So after a brief post-report sell-off corn has rallied to new highs above $6 a bushel. I still lean toward the market trading lower once the crop goes in the ground, as it has done the past couple of years. From a macro standpoint, I also think we will see an increased movement toward shifting ethanol production away from food crops to something a little less critical to grocery items.

Today is Payrolls. I think in the net it will be a non-event. Everybody knows the economy is slowing down, and that the slowdown is finally filtering through to jobs. Unless Payrolls is off the charts down, which I doubt, most participants have shifted concern to the front end, particularly the housing and business investment numbers. As well as, of course, any lingering write-down revelations from the financial sector. The only prediction I would make today would be for a fade of Payrolls regardless of the direction. I think for now the top end of the trading range in stocks holds and the bigger question will be how much of a retest back down will they have.

April 2, 2008                 Technical Basics Amid Anecdotal Confusion

6:15 AM New York time. We're entering the second quarter and I still do not have my account back. My crew at Bear thought is would only take a couple of weeks to settle out where they were going to land. That was 20 days ago. I'm hearing that JPM is being a bit of a prick about it. JPM doesn't want the FCM (futures commission merchant) part of Bear. But they also don't want to let the brokers at Bear out of their non-compete clauses. Meanwhile meetings continue on a daily basis and I'm sure, one by one, customers loyal to their Bear brokers are being forced by time and circumstance to do business and move accounts away. I admit, I too am getting a little short on patience. I'm still sorting things out in my mind but I think generally markets ARE starting to stabilize and that's going to mean fresh opportunity. In the meanwhile… I keep watching and thinking about how I WOULD have handled certain situations and price moves.

On the anecdotal information front things (for me) remain confused. One of my oyster customers who operates out of lower-central Connecticut, servicing Fairfield County, suburban home of a great number of hedge funds and financial service ancillaries such as UBS and RBS/Greenwich Capital, tell me business for this time of year is better than last. My Canadian account can't get enough product and even my little local mom-and-pop just around the corner is busier than last year in what is normally a slow time in the seafood business. Seafood prices have really become a high-end item do to cost driven by falling availability. You would think it would be among the most sensitive to an anticipated weakening in discretionary income. On the real estate front, the developer who bought the land behind us is just wrapping up putting the siding on the second spec house and there is already a sale pending sign on it. I don't know if the lot was sold contingent on the house being built or not. If it wasn't… that was a pretty quick sale. In my travels around our particular area of southeast Connecticut there is clearly NOT an abundance of For-Sale signs, yet my neighbor who does title searches and real-estate research says things are still very slow. This dichotomy in anecdotal evidence has really thrown me for a loop. Normally I rely on my own observations and personal conversations to confirm or deny what the government statistics and economists are saying.

In light of this confusion I have reverted to a far more simple and basic technical appraisal of the markets. We have just come through a period of extreme panic. Regardless of your view on the economy, we can all admit that there are a great many participants with positions on that may not be of their own choosing… some are the result of panic and duress in an attempt to protect what's left of a portfolio or as a result of trying to capitalize on alternative opportunities in other markets. That being the case, on any given day (like yesterday in stocks) we can get a huge rush to cover shorts or reestablish core holdings… despite news in the morning that could have easily driven things in a negative direction. The financial press is speculating (once again) that the worst of the ABS write-downs are behind us. They are guessing. The financial press is also speculating that the Fed is largely done easing, and that whatever write-downs are still to come, will come from European banks, whose disclosure has been slower that in the US. That's why the Euro got hit. They are guessing.

So rather than guess at facts and future events unknown, I'm keeping an eye on the price charts to see if anything has really changed. Behind all of this fundamental information will be massive capital flow… capital flow than can drive prices a long way even with the same macro environment and credit market conditions. In all of this I still see the Dollar and the Equity markets as the key drivers of all other markets. The Dollar Index remains below its reaction high of a week ago Monday. It is debatable if that reaction high a week ago is even a significant high. So all I can objectively say about the Dollar Index is that it continues to consolidate sideways. Until we get confirmation of a significantly higher high or higher low, I am going to assume that the trend down remains intact. That means that while commodities may continue to correct or go sideways, they are still on the buy list at points where sentiment gets extreme and especially in conjunction with key technical support points. Gold for example would seem to be a good buy from yesterday's lows down to $860… especially with the recent spec washout. Cotton is back to where it started before its spike. Stocks are a little tougher call. June S&P futures got right up under what I think will be an interesting resistance point right around 1380. And once again… until we get a bona-fide breakout, we need to look at rallies like yesterday as primarily short covering in nature, and to be sold at overhead resistance. You can simply invert the strategy to have a view on Treasuries. If the stall in stocks and the dollar takes place, the next thing I will be watching for is where participants set the subsequent lows. Remember… bear market turns can come as a result of a major higher high, OR, a major higher low. Lets see where both these markets print their next ones.

Mar 31, 2008             The Good... The Bad... The Inevitable

6:15 AM New York time. Earth Hour took place for one hour on March 29th of this past weekend. My wife asked me if I had any interest in participating. I thought it was pretty funny she even suggested it. My wife… who will leave every light in the house on while she's watching TV in one room. My wife… who will let the hot water in the shower run for a couple of minutes while she gets ready to hop in. To me… this is exactly why manufactured events like Earth Hour are more a BAD thing than a good thing. They make us all feel better about doing something good momentarily, but don't really get us to make meaningful life-style changes that will, over time, REALLY make a real difference. It's like Catholics who blow off going to church every week but then show up on Easter and Christmas and expect everything between themselves and God to be OK. I'm an oyster farmer. I plant half a million little water filters every year. We live a low consumption life-style on a very modest income. Most people would have a hard time believing we live as well as we do on what we bring in. We have opted to stay home with Sydney 4 days a week (2 days for each of us) instead of both working and putting her in day care. Despite my wife's poor energy consumption habits… (I run around behind her turning things off)… we LIVE Earth Hour every day of the year.

So I find it more than a little ironic that events in the financial and real-estate markets are starting to do what Earth Hour will never do. And perhaps the evolution of those events will ultimately turn the US from being the world's biggest consumer of energy and other raw materials into a more modest one. So while Hank Paulson, George Bush and Ben Bernanke are busy running around trying to revamp banking and securities regulation to keep the credit markets from freezing up and the economy going, I'm sitting here thinking that it may simply be the case that the weaker dollar, driving higher raw materials prices, in a post-housing bubble bust, while our financial services-based economy implodes on itself, reducing both the number of jobs and the gross income produced, will ultimately do more for the environment than a whole bunch of Earth Hours strung end to end. And in the end… these same events will bring us that much closer to true energy independence and far greater capacity in renewable sources. The slogan of "two cars in every garage" will slowly be replaced by "a solar panel on every roof".

And since much of the developing world looks to the US as the model by which they want to live their lives, it will also be a good thing for us to reduce our degree of conspicuous consumption so that the rest of the world can see that being a little poorer is not such a bad thing. And perhaps… ultimately… people in this country will actually come to find out that bigger, better, faster… frequently does not equate to happiness. And while one might live on a little less, the time gained from not having to be connected to work every second of the day will free up time to draw or write or read (for pleasure), or perhaps spend more time with the kids instead of shuffling them off to day care.

Mar 26, 2008                 Negative Success

7:00 AM New York time. This is a supplemental piece having nothing to do with markets but having everything to do with reality and the perceptions we create and want to believe. At this very moment my local TV news is doing a piece about scientists at the Woods Hole Marine Biological Lab, who are working to train fish (Black Sea Bass) to respond to an electronically generated tone and return to a "conditioned" feeding site. I saw the same piece on Yahoo news only yesterday. A web search shows the news pasted all across the country on such reputable sites as Discovery and dozens of local papers. Yahoo news titled the piece "Pavlov's fish". It seems like a wonderful concept that could change and indeed revolutionize finfish aquaculture in the future. But like so many things in life, knowing the personalities and the background give one a different flavor for the issue.

When I worked at the fish farm in Massachusetts, which was then called AquaFuture, the same scientist who is currently running the fish-training project at Woods Hole, was in charge of the hybrid stripped bass spawning program. Buying baby fish (fry) was a major cost input at the farm, so being able to maintain a supply of young through an in-house breeding program was critical to the bottom line. Unfortunately this particular scientist was not only a sloppy scientist, but had an ego a mile wide and refused to acknowledge that perhaps he was not the best person to run the project. At the time, there were people on staff who had a long track record of success at stripped bass spawning but they essentially had no input into the process. The true talent of this particular scientist was securing an unlimited supply of grant funding for a succession of projects at the fish farm.

So it came to one morning in particular that I remember as clear as yesterday. Indeed it resulted in one of those timeless quotes that is indelibly carved in my memory, and which I still use to this day when the sarcasm and sense of irony reaches high enough. The "greenhouse" team had been up all night with the fish trying to induce what was hoped to be a major spawning effort. The greenhouse was a separate building to the main plant where hatchery and nursery operations took place. The entire day shift was sitting around for the morning meeting waiting to hear how the prior nights spawn went. The scientist in charge came in and started to describe the evening's events. "Well... we've had some negative success...". I couldn't hold back... "What the HELL is negative success?!!". Turns out, negative success really meant that the spawn didn't go off well but they did learn a few things about what went wrong. The damage was done though. The term "negative success" was now in the staff vocabulary and it was a frequent quote whenever things went wrong… but hey… the plant was still standing and no one was killed.

So my scientist buddy is back at it. He has secured a $270,000 grant from NOAA to try and teach fish to come when called. His salary and indeed a chuck of Woods Hole's expenses have been funded (at least in part) for yet another year. I have no doubt this fellow is the same sloppy scientist he always was, but he has not lost his talent for securing funding.

The world is indeed a complicated place. We can think we have a handle on what is going on when in fact we don't have a clue.

Mar 26, 2008                 More Filler

6:00 AM New York time. I have not been following the polls, so I found it hard to believe that the latest show, if the US presidential election were held today, McCain would beat either Clinton or Obama. It would be a cruel irony if the weak economy worked to divert people's attention back to domestic concerns and threw the election back to the Republicans and away from the chief democratic issue, which is getting out of Iraq. I would indeed be flabbergasted if in November, this country essentially opted for the same set of policies as we have now… stay the course in Iraq and leave the markets to sort out their own issues. At this point, I would really like to see the US elect either a woman or a African-American president, though I myself do not care for Hillary. I think it would go miles to change our world image if we could show the rest of the planet that this country can swing from ivy-league and white bread, to; "is he a Muslim" in four years. McCain just represents the same old tired rhetoric if you ask me.

Well… that was one paragraph of time I killed. I remain on the sidelines in the markets. I don't think that's a bad thing. Highflying commodities have taken some sharp breaks. Stocks are trying to make a move away from their lows. As I said days ago, I want to get back to basics. That means simply making a broad appraisal of trend from the objective observation of higher highs and higher lows or vice-versa. I'm going to stop trying to read swings in sentiment. I think part of my problem was that events had moved to such extremes that they were dragging in a far broader group of participants across many investment time frames, throwing off my usual read of the fixed group of daily-involved professionals.

So returning to the basic approach I would have to say that the commodities are still putting in higher highs and higher lows, while stocks are doing the opposite. Corrections to the major trend remain sharp and violent… as corrections should. So while I'm not in a position to do anything about markets now, I'll be watching them to see where they put in their next major technical points. Clearly some of them are controlling others. Stocks are running bonds and the dollar is running commodities. So if the Euro makes a significant lower high, it will carry more weight than if sugar does. And if stocks make a higher low of significance it will mean more that if 10-year yields do.

Meanwhile I'm still waiting for my account to resurface somewhere. I'm hoping it gets worked out in the next couple of weeks. In the meanwhile… please enjoy a favorable review of our Mystic oysters.

Mar 24, 2008                 Valuable Insights and Information

6:00 AM New York time. Yesterday was another one of those family gatherings (this time my wife's side) that give me an opportunity to size up what people from various professions think about the economy and the general state of things. My wife's side provides a broader view by virtue of more people. My brother in law was his usually curious self, but aside from that, no one expressed much concern regarding the goings-on on Wall Street or their particular situations. That's one of the very odd things about our current financial environment. There have been times in this whole affair where I have wondered if the capital market meltdown was going to end up being confined to the New York area financial market industry. Perhaps that's just a sign that complacency remains too high. But for some reason, it still seems like things on the local level continue to get done and get done relatively smoothly. We've had a number of properties around us sell in just the last month. Real estate that is priced right is selling. My wife works at a small, half-state-market, mutual bank… and I swear she's their main source of news on all this stuff. No information there.

In other news… I've heard in the just the last week of two new hedge funds starting up that will invest in "distressed" mortgage-backed securities, one is going to be run by an ex-Lehman mortgage guy, and the other one is being started by an ex-exec of Countrywide. I suppose it had to happen sooner or later. I'm still paying my mortgage every month (as are virtually all of the people I know) though I have no idea how many cents on the dollar it is trading for. I guess it makes sense… if you can pick up the paper for 75 cents on the dollar but only 3% of them are going to end up being non-performing… seems like there would be some pretty good cash flow there. So while the TED spread continues to widen and risk aversion increases… the first vultures start to land and pick at the carcass. Are they too early? Who knows? No information there.

Meanwhile… commodity prices were off sharply across the board last week as more hedge funds joined the ranks at risk for margin calls and selling of whatever asset class they can to raise capital. Is this a fresh buying opportunity in some of these commodities or are odds increasing that the ultimate outcome of a deeper US slowdown will be deflationary a-la Japan in the early nineties after their property market bubble burst? Once again… no information there.

I'm so glad I could provide you with valuable insights and information this morning. I never thought I'd find myself writing just to keep a column active. Have a nice day.

Mar 21, 2008             I Don't Wanna Play No More

6:00 AM New York time. The funds I trade have not found it to a new shop yet. I am trying to give the crew at Bear, who I work with, some time to settle somewhere else. I'm not a fund who has multiple brokers through which to trade. It looks like it will take a couple of weeks. To tell you the truth… with what I see in the markets lately… that's just fine with me. Hyper-volatility seems to be in force everywhere. Market direction seems to be in doubt everywhere. While plenty of traders may love it that way, it doesn't fit with my methodology. Signals I would normally use to enter or exit have no lasting impact… or at best a couple of hours. I am using the time off to let things settle out. I don't know how long that will take, but I don't think we've seen the last of the craziness. A reliable source told me yesterday that the Q1 hedge fund community results were going to be terrible. Will that set off another wave of liquidation and redemptions?

So while I sit outside the play circle for a little while, I'm going to start conditioning myself to getting back to a more basic approach, and tying to look at things with a fresh eye. The huge run up and subsequent break in commodity prices has thrown yet another market complex into doubt. And since my account issues may not be resolved before April, I think I have to acknowledge that I may be looking at only 8 months in which to post some results. 8 months is plenty of time. But it's also plenty of time for even an established bull market to experience a decent bear correction. My basic approach is simply going to require looking at the daily charts and asking myself… "Self…are we making higher highs and lower lows? Or the reverse?" I must embrace the fact that anything can happen in the markets right now. The commodities may bounce right back as the dollar resumes lower… or they may not. The Fed may also have done the last or it's easing… with the ECB left to do its part as their economies slow. So perhaps the dollar is due for a rebound and commodities will remain under pressure. Perhaps the worst is behind us in stocks and so they will rally at the expense of bonds. Or maybe, as some have said, we are destined for a 90's Japan style housing/economic recession that will drive rates toward zero and continue to beat on stocks. Amid all these questions are the exogenous factors such as flight to quality and raising liquidity that are playing havoc with participants ability and willingness to take risk.

Out of all this chaos I have no doubt, will come tremendous opportunity. That is the nature of our world and it will always be so. The deeper the crisis and chaos, the more meaningful will those future opportunities. The more important question for many will be… will you still have the capital to take advantage of the opportunity when it arises? The shakeout in the housing market, which catalyzed a shakeout in the asset-backed securities markets, is now catalyzing a shakeout in the hedge fund universe. Who knows who will be left standing when all the dust clears? One of them will certainly be me.

Mar 17, 2008             Hail To The Gold Bugs!!

6:00 AM New York time. As I look back on the evolving developments of the past few months, developments which, have accelerated over the past weeks and days, and even now, the conclusion of which is still highly uncertain, I have to acknowledge a certain group of investors. No… it was NOT any Wall Street strategist, nor prominent macro hedge fund personality. It wasn't any group of economists from any mainstream organization. It wasn't even the Dennis Gartmans of the world… who, while they may claim to be on board this move, are simply one more group seeking to ride the wave of momentum as far as it will carry them, and whom I'm not even sure has any REAL positions on. None of them were there at the beginning.

No… it was the gold bugs!!!

Yup… that group of "fringe-element" capital market participants and pundits who for years have had their ideas and prognostications pooh-poohed from every corner of the investment world. I myself have more than once scoffed at this gloom and doom crowd for their dire predictions. But as I sit here now… it is glaringly apparent that in aggregate… their prognostications have been accurate to a degree that borders on the scary. If you count yourself among them, and that's easy to tell because most of them hold physical hard assets safely tucked away in various locations, then you should take a moment to pat yourself on the back. In all my years in the market I have never seen a group get something so right… essentially from out in left field… when only a year ago, all indications from the capital markets showed nothing to indicate the kind of systemic strain we are seeing now. Bear Stearns was trading $172 in January of 2007!!!. And it's not just a drib here, a drab there… they have gotten EVERYTHING right… from the collapse (and I think at this stage we can say collapse) of the world's most prominent fiat currency. To the failure of a major (and before its over, perhaps more) financial institution(s). No… things are not done yet!

What they may also yet prove, and what many of them have warned all along, is that owning real physical assets is far different from owning physical assets on paper. Even if I were firmly on board these market moves, it would be very hard for me to take advantage of them with a futures margin account at Bear Stearns. In fact I did… and that money is no longer there… but where does one put it to trade? Events are still unfolding even as I write this, and in the end we have no idea who will be left standing. I do not need to report on how global stock markets are performing this morning… nor on where the US Dollar has been.

And so in deference to the gold bugs, I make this suggestion to the US Federal Reserve. It is no longer interest rates that matter to the US economy or her major financial firms. You could put Fed Funds at zero and the problem would still only accelerate. We have entered the "unthinkable" realm of the worthless currency. You are lowering interest rates and making capital easy and accessible. And with every step and statement the dollar loses more and more of its value. Gold and oil continue to soar. It is questionable that most of the short-term funding you are throwing at the markets is even being used… it is an UNWILLINGNESS TO LEND, not an inability! You are pushing on a string in a huge way. The measures you have taken to accept alternative collateral will go a lot father in trying to patch up the system than lower Fed Funds. I think you must do what the gold bugs have said all along… you must throw caution to the wind and exhibit some monetary restraint… STOP SIGNALING LOWER RATES. You must recognize that the problem has morphed from one of markets starved for capital to markets starved for confidence… in a currency… and in a system. Just one signal that you are going to take a different approach, and not address the problem primarily through lower rates could set off a huge short-covering reaction in the dollar. That would drive money (at least for a while) out of oil and hard assets. You can do all you want through various mechanisms to shore up crumbling financial institutions, but you cannot keep throwing liquidity at the problem. That solution is now doing way more harm than good.

I have no doubt that my tiny voice amid the clamor will NOT be heard. It is a very counter-intuitive solution to a highly politicized problem. Perhaps… to really fix the system we actually need to see the crisis come full circle. Perhaps we need to see two or three major Wall Street firms fail before the lesson is learned. If we thought real estate is in a funk now… imagine several hundred thousand financial services industry layoffs over the next two years feeding back into housing valuations in major metropolitan areas. Sure you say… now all of a sudden I'm hoping on board the gloom and doom express… that MUST be a sign of a bottom. Perhaps so…but the way I see it… I'm simply getting behind a horse that has already proven itself, and is already way out in front in calling a race with a still uncertain conclusion.

Mar 14, 2008                     Retail In Commodities

6:00 AM New York time. I was chatting yesterday with an old high school friend. We spoke a bit about the markets, because by now, real estate, the economy and the democratic nomination have taken center stage in the news away from the war in Iraq. One of the trades he mentioned had done extremely well with so far this year was a purchase of an oil-based ETF. I'm not sure which one it was. I have to admit, it was the first time in my life I had someone who was a market-non-professional mention trading in commodities. I warned him of the potential volatility of commodities and he assured me he had a trailing stop and was being conservative. And while my friend is very astute for a retail investor, I couldn't help but think back to the days when NASDAQ was flying and professionals were getting tips from their doormen on which internet companies they were making money in. I wanted to relay the information to my oil-trading friend… we'll call him Jim. And while I was waiting for Jim to jump on the line, I told the story to his desk-mate. When I was done, this fellow told me that his neighbor had told him only the weekend before, that THEY had just purchased shares in a popular commodity ETF… and by the way… what did he think of the oil market? For the record, these are two completely unrelated and unsolicited events.

My wife… who over the years of hearing my diatribes has picked up a bit on how markets work, and has developed some distinct personal views of her own, had yet another interesting observation. She said as long as the "main street news" is full of stories of rising energy prices and a bad economy, oil prices will continue to up and the economy will continue to sag. That seems like an obvious statement. Her point was, it won't matter what weekly oil stats are. And it won't matter that the IEA continues to lower forecasts for global demand. That news is for professional consumption. We could be swimming in inventory, but as long as the broader media is full of news on soaring energy prices, they will continue to go up. She noted that most of what she hears these days is recession and higher gas prices. I see myself that one of the top headlines this morning on Yahoo news is that gasoline is up above 4 bucks in parts of California and Hawaii. I suppose all this can fit in with my existing capital flow view, that as the public is bombarded by this news, they continue to pour millions of dollars into ETF's (which they have never been able to do before)… to both protect themselves and try to profit, and that flow drives prices ever higher. So spreading the logic across other markets… it won't matter what Prospective Plantings will be at the end of the month for corn prices. Grains will continue to go up regardless. So will gold and copper. The dollar will continue to go lower. As long as economic bad news continues to be the lead story in the popular press… current price trends will remain intact. My wife's last point was that… before anything can change… we first need the media to get distracted by another story. For the record, CNBC gets the majority of its information from professionals. So they will cease to act as a contrary indicator whenever the media attention on an economic issue extends coverage outside of professional circles to the larger public media.

So as I think about all this, I'm starting to fit it in with some recent conversations I had with Dave Lewis… about tail-end events. 90% of the time in financial markets, news that drives prices around never makes broader press coverage for general public consumption. But once in a while, such as we have now, events are large enough such that an economic view gets pushed out and becomes an issue for the general public. Could it be that spike events in price action and sentiment extremes correspond to those times when the economy or economic issues become "network" news? Could it be that this is the critical threshold that takes a topic outside a middle-of-the-normal-curve reversion to mean oscillation into "spike" territory? The amount of money that the public can move around through its investing channels (when it decides to) is far larger that that moved around by pure professionals on a daily basis. And when pure professionals come up against this river of capital, the usual rules they play by are no longer valid. And if they keep using those rules, they are bound to get into a situation where they are fighting relentless capital flow day after day. Sound familiar?

I'm not saying I have "seen the light" and am going to dive into some long commodity and short dollar positions while the music is still playing. I'm simply saying, I may have a better insight now into how the different sized wheels of life interact to move our lives (economic and otherwise) forward. And one has to adjust capital market thinking depending on which wheel is perceived to be in motion. It may also be better insight into what needs to happen first to make the music stop and have participants looking for chairs.

Mar 12, 2008                 Was That Meaningful?

6:30 AM New York time. Yesterday's action by the Fed is all over the financial news. The debate rages on as to whether or not this was a good move or not. What I would say is that Mr. Bernanke is certainly getting his baptism by fire. And while it still remains to be seen if yesterday's move will achieve the desired results, it speaks a lot to the creativity that the new Chairman is willing to sanction. The Academic is getting some real-work experience into how the Fed and the capital markets function outside the textbooks. I personally have no opinion on the move. By the end of the day, stocks seemed to love it; the dollar (and thus commodities) could care less. Bonds reacted to stocks. I heard prices for mortgage securities were little changed. Many of the markets were ripe for corrections anyway; so much of the reaction speaks to where the markets were rather than what was really achieved from a policy standpoint.

What I will say for myself is this… we are working through one of the most emotionally charged periods I have seen in my 26 years in the markets. I know of and speak to more than a few sharp market minds… and many of them have no clue as to what is going on and where we are headed. Most will say that many of the historical bounds of financial market relationships are being stretched. Historical areas of risk (such as commodities) have become ports of safely. Prices in many markets are defying glaring fundamental developments. For people (like myself) who generally play a reversion to mean contrarian strategy, such conditions have repeatedly tested personal patience and fortitude… not to mention money management discipline. So yesterday was simply another one of those days that has one asking… does this change anything? I will say this… every time we come to an event-driven crossroad such as we had yesterday, the POSSIBILITY exists that a change has occurred which will generate a new directional cascade in the markets. In all cases… only time will tell if a new or different theme can assert itself. All these temporary inflection points start as short-covering rallies, and to date that is all any of them have been. In each prior case reaction rallies have faded and the primary trend has re-asserted itself. So yesterday is just another one of those tests that beg the question; was that it? If recent history is any guide… yesterday will simply turn out to be another chance to get on board existing trends… as stretched as many people seem to think they are. Still… for people like myself who have invested a huge amount of time and energy into getting ourselves able to look a panic in the face and go the other way… the issue goes deeper than simply pulling a few bucks out of the financial markets to a discipline that guides one's life. And like the roll of the dice that comes up no-7 for the tenth time in a row… we (I) keep telling ourselves (myself) that next time's the charm. And each time we roll the dice it comes from an even higher and more stretched level (as we perceive it).

I can't leave today without saying something about our latest comic-tragedy that is Eliot Spitzer. I'm hearing on the news this morning that he is not going quietly and still has not submitted his resignation. Get on with it Eliot. I read some of the federal affidavit, which is now pasted all over the web. The longer you prolong this agony the more dirt is going to come out on you and this whole sordid affair. Soon everybody will know the extent of your indiscretions. The alleged liaison in Washington was NOT your first time. I suppose like so many megalomaniacs before you… you STILL refuse to believe you are done. Take a word of advise from the markets. Stop yourself out now. The capital you are spending is your reputation, your family and your very life. Bow out before you get a very public margin call.

Mar 10, 2008             The Wheels On The Bus Go Round and Round

6:00 AM New York time. Yup… that's a big one for me now. And yes… I'm a little punchy. Friday saw confirmation from US Non-Farm Payrolls that at last, the housing-instigated-credit-crisis-accelerated; US economic slowdown is finally spreading into employment. The 3-month moving average of Payroll growth is not pretty. For those who were still holding out that events would not blossom into full-blown recession… be advised… the feedback cycle is now complete. Nothing stands in the way of further weakness begetting further weakness. The stock market… the quintessential proxy for the economy is not reacting well to lower rates. It seems to be reacting more in an adverse fashion to the lower dollar. So oddly enough… the Fed may have worked its way into a difficult situation where lower rates are actually hurting stocks because they are doing nothing more than weakening the dollar which is driving money to the commodities, which is generating an inflation in basic staples, which is feeding back negatively into stocks. Next thing you know you'll have Jim Cramer screaming at the Fed from his CNBC bully pulpit that the Fed should STOP lowering rates. It's a complicated world out there all right.

For myself… I still don't see a whole lot I want to do. Many of the commodities… especially Ags… have pulled back sharply from their highs. If you wanted to own some of these, now is your time. Personally… and as I've said… I feel very uncomfortable getting long row crops in front of a brand new planting season. To eliminate that potential problem, you have to stick with metals or energy, and then you're right back into the dilemma of buying on strength, and competing with every other commodity fund out there for contracts. Additionally, and from a macro perspective, if the US economy does continue to slow, its highly likely were going to see reduced demand for goods, which cannot help but feedback into lower producer sales, which will reduce their demand correspondingly. Yes… yes… yes… developing economy infrastructure projects will continue to move forward and provide an underpinning to basic materials prices. But on the margin… I still think it nets out into improving FUNDAMENTAL supply situation of many commodities. But that brings us back to the nagging question of "does supply make a difference". In our current environment… it may not.

As far as the financials go. We had a minor reversal on Friday in the Dollar Index after the weaker than expected Payroll numbers. Normally… I might like to use such a technical development to make a contrarian trade off of. But capital flow away from the dollar is SO pervasive right now… trying to use such a minor price action subtlety as indicative of a bounce is truly pissing into the wind. So not only has nothing changed in financials… things have gotten worse. I guess some of the cash equity indices made new lows for the move on Friday. The S&P futures have not, but they are so close I would expect that over the next day or two. That should give us new lows in 10-year yields, further weakening the dollar. Meanwhile… mortgage rates will probably go nowhere… so even if it were not enough that lending standards are now a lot tighter… the cost to qualified buyers has not come down. It's the classic scenario of pushing on a string.

My advice to you - go out and find some body to listen to who has gotten it right and stay on top of what they think. These are the worst kind of markets for me right now. Everybody and their uncle is on board the theme but prices continue to gratify that theme. It's what I would normally call late stage trend action but without a single piece of evidence that we are reaching an exhaustion point. If I had caught the move, this is where (ideally) I would be hanging onto my core position but certainly NOT willing to leverage up, and also very cautious about signs indicating an exhaustion bottom. Having missed the whole thing… I am relegated to the sidelines until we either have a meaningful correction to either get with the current program, or interpret as a meaningful change.

Mar 7, 2008             Glaring Inconsistencies?

6:00 AM New York time. I've been thinking a lot about conditions and ramifications this week. I find it interesting that some of the people most bullish on gold and oil are also the ones most bearish on the US economy and her financial system. Sure the weaker dollar has the primary driver of the move in commodities that we have seen. But, and lots of people smarter than I are asking this, can a rise in commodities continue along with a slackening in aggregate demand? Inflation may be a monetary phenomenon but at some point reduced demand will generate a swelling of inventories that I would think would just be too hard to ignore. To a point, I agree that excess liquidity can generate inflation. But I don't think inflation in a particular commodity is consistent with the accumulation of excess inventory in that commodity. I know that in some cases and early in the game it has been possible. The US crude oil market is a good example. Prices continue to rise as demand slows and inventories grow. Inventories in the US are comfortably well above their five year averages. My oil-trading friend Jim, who has been as bullish as anybody the last half-dozen years has recently turned bearish (at least in the intermediate term) because as a result of his inventory analysis. Yet bullish pundits will point to GLOBAL tightness as to why prices refuse to acknowledge the inventory builds. Even T. Boone Pickens has recently gone on record as looking for an intermediate-term pullback. Global equities got pummeled again last night after a poor close in the US yesterday. You can't tell me that if things continue to erode in the US (as reflected by equities) that GLOBAL demand for commodities won't slow as well. The US consumes half the world's refined petroleum. If it continues to get bad here, it's going to get bad elsewhere.

I acknowledge that conditions and the outlook in the US economy have gotten worse than I expected. The dollar and the stock market have broken. Clearly I had it wrong and missed the boat. But that's all water under the bridge now, and going forward I have to look to what trades are going to be generated out of conditions as they are now and are projected to be. And one of the things I see is a land full of spec driven, pumped up commodity prices at a period of falling demand. If any of you reading this can point to a period of sharp economic contraction that was able to maintain a strong commodity inflation bias… I would be happy to hear about it. I am not the student of economic history so many of my readers are. I can far more readily accept a major contraction as having deflationary effects than the opposite. One of the markets I want to look at are the grains… especially in light of the fact that we are coming up on the USDA release of Prospective Plantings at the end of the month. Corn and soybean prices are through the roof in apparent disregard for what could be a fence-row-to-fence-row acreage year. And as one of my readers kindly pointed out… perhaps playing for this potentially bearish report would best be done with some affordable puts. Spend the money and let things play out.

One last thing… I find it interesting that you here almost nothing these days about Chinese factories that continue to operate and pump out goods at a loss as well as problems they have with their own credit and banking systems. I guess when prices are on a roll you don't worry about stuff like that.

Mar 5, 2008             More Useless Dribble

6:00 AM New York time. I have kept myself out of touch the last couple of days. I had a lot to do in oyster-land including an FDA inspection on Monday… so that was perfect. Every once in a while you need to take a breather to get your own perspective together. I've betting getting my perspective together for the past couple of weeks. The Dollar Index is finally having a bounce after a bunch (I think 8) of consecutive down days. There's nothing special about the bounce behaviorally for me, so I'm just going to keep an eye on it and see what happens. Perhaps we can generate some kind of interesting retest that will give me reason to take another shot. Yesterday a guest on Bloomberg news was talking about expectations that many more US tourists will be staying within US borders for their vacations this summer. I guess you could say who cares… I simply mention it out of context as another indication that real capital flow is reacting to and altering their buying patterns in response to price levels that the speculative crowd has driven things to. The thing about currencies, which I alluded to Monday, is that they are quotes vis-a-vie another currency. It's not like gold that is a currency unto itself and gets priced accordingly to whatever currency you have used to purchase it. So in order to be really negative on the $/Y, you kind of need to be bullish Yen too. And I simply don't think any of our G-7 partners have that much over us in the economic fundamental department… certainly not a halving in worth against the Euro since that currency's inception. The question of the dollar is a lynchpin of dozens of commodity markets out there, many of which are relying solely on exchange rates as justification for higher prices. I have to think the model funds are now loaded to the gills with all manner of maxed-out exchange limit positions in every tradable market.

Mar 3, 2008                     Useless Dribble

6:00 AM New York time. I'm still on the sidelines. My former trades have gotten to prices where I'm very comfortable with my having given up and exited. It's like feeling better when there are a bunch of new people behind you in an already long line (queue). I'm well passed the spot where I'm pissed about getting the trade wrong. I'm firmly embedded in territory where I'm just happy to have not been too stubborn and had it cost me a lot of money. I continue to notice some interesting contrasts in commodity land. Wheat (where there IS a real supply issue) is back to $10, looking like it has just come through a blow-off spike top. Cotton and sugar… two markets where there is no supply issue… continue to rally sharply as speculators pile in. I have nothing new to say regarding the rolling excesses I see in the commodities right now. Many are firmly embedded with an invest first, investigate later tone. When you see how much managed commodity money is run on a systematic basis compared to a discretionary or fundamental basis you understand how far these things can go when this money is piling in.

The hardest thing through all this is the sitting and the watching. It's what I have to do. There is no way I'm going to chase any of these trades. And there is nothing I see that indicates even the slightest change in tone. I've made (and profited from) some good calls over the past couple of years; it is only natural to make a few bad ones. The fact that this is a BIG bad call… well… that's just the way it goes. The point will always be to lose less when you're wrong than you make when you're right.

It may also be a while before I get the proper conditions for a trade. My whole gig is looking for spots in the markets where price action has ceased to validate the tone of news, and the position skew is way over on one side. Those two conditions create the "accident waiting to happen" trade, especially in an environment where there is ample fuel for a contrarian story to develop. An early stage of that scenario is a participant base trying to get out of painful positions. The problem in so many of these markets now… is that they are SO far away from causing any real pain… that it would be days before I could even get the slightest inclination that a vulnerability exists. How far would soybeans have to come off to make longs worry that the trend is broken? Whew!

In the meanwhile, I'll continue to keep this column up with a trickle of useless dribble that will gradually erode my readership and lose any respect I might have gained over the past couple of years. Cycles need to run their circles before they can come back around again.

Feb 29, 2008                 Those Grapes Look Delicious

6:00 AM New York time. I don't know why I'm bothering to write this morning. Habit? And I certainly don't know why anyone would want to read this column lately. Perhaps to use as a contrary indicator? The only consolation I have in all of this, is my standard fallback of being an actual commodity producer. We (my fellow Co-Op members) spoke only just the other day about perhaps showing our product to a seafood wholesaler who moves product abroad… to take advantage of the weaker dollar. And while I don't own corn, or wheat or beans on the Chicago Board of Trade… I AM set up to grow, store and move the commodity I do produce… which puts me a damn sight ahead of a simple speculator who will never touch, or even see, the commodity he/she is speculating in. In fact… the only person I know who actually takes delivery (essentially) of the commodity he is speculating in is Dave Lewis. Though I'm sure a lot of his buddies own physical gold (and other metals) too. Metals are actually one of the few commodities that have enough value without a corresponding mass, that one can actually own a decent valuation amount and not have to store it in a silo. Hmmm… I sound like the wolf of fable that just couldn't reach that big juicy bunch of grapes. I think it was a wolf anyway. There I go again… more mis-information.

However… there ARE some things in paper-commodity-land that I find very interesting. I've been keeping an eye on wheat. Wheat (along with gold) is the granddaddy of commodity bull markets. Wheat IS in short supply. Wheat has been in a bull market long before the host other commodities that are now running higher too. Wheat is testing prices that would have been inconceivable a couple of years back. But take a look at the daily chart. On Wednesday, CBT July wheat ran up 2 ½ dollars in a single day… that's 25%!!! It closed a full dollar off the intraday high and was down close to another dollar yesterday. All I can think of when I see that price action, are the monthly continuous contract price charts of the commodities I used to look at when I first got into the business back in the early Eighties. Like a little kid looking at a map of some magical place, I would imagine what it would be like to be there, while some of those commodities were putting in their apex spike highs back in the inflationary Volker-era seventies. I can't imagine the charts I'm thinking back on would look much different from the monthly continuous contract chart we would be looking at and be in the midst of today. And so I ask… would any of us look back on that chart from the seventies and suggest that it would have been a good time to be getting INTO wheat? If a 25%-of-price single day advance in the price of any globally used commodity does not constitute a blow-off… then I shudder to think what new heights and new volatility those prices could go to if it's NOT over!!!

Tell you what… if speculative pressure in some of these commodities does not abate soon, I think the next macro factor we'll have to consider would be legislative. Can you imagine what would happen to some of these commodity prices if there were a suggestion made in Congress that to trade them you had to be a bona-fide producer… or buyer… or merchant. I am certainly not suggesting that. I'm only pointing out the repetitive tendency of the capital markets to drive prices to such extremes that they in fact sew the seeds of their own destruction. Ironic given that the very same excesses in the credit markets that participants have been desperate to get their capital out of, are driving a lot of the push of capital into commodities.

For the record, all of the above means absolutely nothing and is simply the raving of an embittered speculator himself who simply hopped off the boat way too many ports of call early. Two months down… ten to go.

Feb 27, 2008             OK… I'm Wrong

6:00 AM New York time. Yesterday finally got me. I had tried one more small Dollar Index long position Monday into Tuesday against the range lows, but I didn't stay involved long and the market eventually broke to new lows. So there you go. It's not about trading the right trade poorly. It's about being wrong. We have new lows and the bigger trend has been reaffirmed. I have always said I can handle being wrong. I just really hate trading without discipline. The recent stall and consolidation in the dollar was only that. And the commodities had it right all along. Commodities continue to be the top story and remain on a roll. Wheat was up 90 cents yesterday or about 9%. I'm sorry, but when the price of a commodity jumps 10% of its value in a day, that's getting close to excessive. I suppose on an individual basis it doesn't matter. The commodities have the advantage of there being SO many of them. One can stall while another picks up the ball. From where I sit, a number of commodities seem to be getting into "excessive" gain territory. The grains are a good example. OK… the winter wheat crop is already in the ground but corn and soybeans are not even in yet. Maybe we'll simply see a blowout of the old-crop new-crop spread. All I know is…it seems a bit reckless to be so excited about soaring prices when acreage this year is expected to be off the charts. Take sugar and cotton. When I originally talked about them earlier in the year, I thought they had a chance to rally… not on supply demand imbalances… but on growing speculative participation. I believe that's exactly what's happening. When you have participants committing capital simply because the price of an instrument has lagged a group of others, that is an indication of late stage behavior… panic to get involved. But these are all relatively small markets. And billions and billions of dollars are out there looking for opportunity. So while all these markets are no longer my preferred early-stage type of trades, I may have to watch them painfully for some time yet. And what I will say is… when they turn… all that speculative capital will then have to get out. And we all know that bear-panics are far worse than bull-panics in terms of volatility. So if the volatility on the upside is an eye-opener to most of us… imagine what the backside will be like. WOW. Imagine a week of expanded lock-limit down days in the grains. It will be something to see. The only other observation I'd make in regard to the commodities, would be that prices of most everyday (non-tradable) food commodities in the stores where I shop have not changed a lot. Sure milk has gone up, but beans and broccoli, carrots, celery, potatoes, lettuce, etc… etc… etc… Are largely where they were. In most cases, this is not about a weather driven supply shock, or a hoarding of the physical commodity. This is about big funds, running lots of money, looking to get in to any tradable commodity market and cash in on what is the best investment return game in town right now. This is a capital flow issue. That is the most significant fundamental that needs to be kept in mind right now.

Feb 25, 2008             Just Fillin' Space

5:30 AM New York time. Not much to say this morning. I remain flat position-wise. I still think we are poking around for an intermediate bottom in both the dollar and the stock market, but I'm waiting for some more definitive behavioral/technical signs. As a contrarian… I can't help but think that. Both markets have taken a tremendous amount of bad news and still manage to hold above recent lows. Sentiment remains very negative. If interest rate differentials were really driving currencies, the Euro should be at 1.55 by now. Still… despite the red flags… neither trade is acting very well nor doing much of anything. For the near term, stocks are being torn between the; she-loves-me, she-loves-me-not, bond insurer news. So long as stocks remain trapped, so do bonds (for the most part). You certainly can't get short bonds if you think stocks have another leg down to new lows. And if you think stocks are putting in a bottom… the OK signal to short bonds… why not just get long stocks instead? The only way you can have your cake and eat it too (as a bond bear), is to have stocks go sideways and bonds slowly erode over time. I'm not a big fan of that trade on an odds basis. As for commodities… led by gold and oil… they just keep rolling right along. Between my bias on the dollar, and the relentless coverage of commodities in the financial media, I still cannot get myself to own them at what I read as a currently excessive sentiment level.

All that leaves me where I am now… nowhere and with no positions. We are coming to the close of February. Two months down, ten to go. Sometimes the hardest thing to do is sit on one's capital and be patient, especially when lots of money is being made around you, and in trades you used to have on. I have to keep telling myself… the idea is not to try to emulate others, or get in on their trades. The idea is to be disciplined and wait for MY trades. Much will happen over the next month. A new real-estate selling season will begin across much of the US. We will get the USDA prospective plantings report in late March… a huge driver in the Ag markets. Oil inventories continue to build and we're heading into a relatively slack demand period. I heard some analyst for one of the big mutual funds the other day on Bloomberg Radio calling for increased government restrictions on speculative activity in the oil markets. Not that I think that would happen, but that's an indication of the emotional length and hype that we have currently taken these markets. Maybe I'm wrong. Maybe there is still a big piece of this current leg of the commodity move left to take advantage of. But it seems to me that the foaming-at-the-mouth in commodities right now is not a whole lot different from the hype that surrounded home prices just a couple years back. All I know is… it would go against every fiber of my being to get dragged in at this point. It's simply not what I do. If that means I'm relegated to the sidelines for another month or two, so be it.

Feb 22, 2008             Going To The Sidelines

6:00 AM New York time. Well… I bailed on my Dollar index long yesterday. I was hanging on to see if it would hold around the .76 area after what I thought was some encouraging price behavior the few days prior, but it was not to be. There is a good possibility that it can hold the recent trading range lows. In that case I reserve the right to go back after it. But it could also resolve its current sideways consolidation to the downside. In which case I was simply wrong on the trade. All told, the trade was not particularly costly, as I have continued to play things generally on the light side. I'm down about 4 ½ percent on the year so far, in a start very reminiscent of last year. I think last year at this time I was down about 9%. I think too… I just need to get my head together a bit.

I chief problem is entirely personal. I tend to be early. My read of excess in markets has always been (and probably always will be) premature. Both ways. I tend to get out too early in moves. I tend to get in too early in moves. Part of that is my own personality trait of always being in a rush. Part of it is my money management methodology that wants to get in on trades early, before the crowd has discovered them. Unfortunately… many times… it's the crowd discovering a trade that generates the best returns. So just as I'm starting to read excess, the flow of money in (or out) is starting to accelerate. It is something I need to keep working on. Another one of my problems in this go-around was my desire to focus on the long dollar trade in favor of the undervalued commodity trade. So I bailed my sugar and my cotton some time ago in favor of the long Dollar Index. Anybody seen sugar or cotton lately?

It's all water under the bridge now. And it has nothing to do with commodities or gold or markets generally. It's about reading excess. When I hear CNBC and Bloomberg radio telling readers and views how they can still get in on the commodity trade I can't help but believe we are close to at least an intermediate-term sentiment excess. Don't get me wrong… I buy the global demographics story. I buy the whole capital flow and small door argument for commodities. I am an actual commodity producer! But many of the tradable commodities have already had huge moves. And you can't deny that intraday volatility has been going up. You also can't deny that there seems to be a "rush" to get in on the game. You hear the commodity story EVERYWHERE! These are all warning signs to me. And it's not about an emotional attachment. It's about the idea that people (participants) can get just as excited about soybeans as they can about real estate. It's about our repetitive human tendency to show the most emotion at the tail ends. Where that "tail end" is… well that's the hard part.

Feb 20, 2008                 Yet Another Layer On The Cake

6:00 AM New York time. We were in upstate NY this past weekend visiting Dave Lewis and his family. We had some lengthy and thoughtful discussions on life, the economy, religion and child rearing. One of the interesting discussions we had pertained to what I call the "spike no-spike" economic future. Most current readers know my general view, that the tide of events (economic, social, political and otherwise) tend to stay generally bounded historically with a tendency to revert to mean. And our human tendency to "panic" at the tail ends, repeatedly leads us to take action (investment, voting, legislative) at the very moments when natural systemic forces are already acting on events to drive the current wave back toward mean anyway. Dave Lewis has always reminded me that… no… things CAN and DO get bad… and that spikes through the "historical" tail ends happen with regularity.

What was interesting about this weekend is that we both realized that our particular systemic views spring (at least in part) from our own personal life experiences. Dave has had a number of "spike" events in his own life… personal, family and professional. He has traveled (and worked) around the world and seen much more of a range of human group behavior than I have. For example… he was living in Asia during the Asian Financial Crisis. Watching a civil society come close to lawlessness, even if just for a short time, can have a profound impact on ones view of human potential. For myself… I have had a comparatively "flatter" life experience with virtually no outlier events (that I can remember) that have left an indelible mark (as far as I know) on my psyche. So our view of markets and our predictions of future economic events is not just shaped by our perception of outside information as it unfolds… it is also shaped by our internal personality traits and life experiences. Not only do we have to deal with incredible complexity in the world around us, but we are internally creatures of incredible complexity, whose rationale for all manner of choices pivot on our summation of our individual life experiences.

None of this is good or bad… it simply is. What is important is that each of us constantly strives to be able to see ourselves in a sense… from "outside". So that when we make choices in life… or in trading, we at least realize that we make them from an utterly complex base, and that we should always ask ourselves if we are making decisions that spring from pure observation… or deeply ingrained personal tendencies. And while one's P&L is in fact the ultimate arbiter of who is "right" and who is "wrong" in the markets, equally valuable is the exercise of understanding the how's and why's of our own decision-making. That goes far beyond trading to life itself and is an incredibly valuable tool in behavior modification… as each of us strives to be the best human being we can be in the time we are allotted.

Feb 15, 2008             Take A Few Days Off

6:00 AM New York time. It feels like a lot is happening in the markets and yet as I look through the charts I see a lot of churning without new directional ground being broken. Many markets seem to be sliding into trading ranges. S&Ps are in the process of building a triangle with a succession of lower higher and higher lows. 10-year notes, while they had a bad day yesterday have simply traded up to the same higher yield level they have already been on three other occasions in this young year. The Dollar Index looks to be stuck in a triangle of its own. The Euro has been roughly between 1.49 and 1.44 since late November. The Yen's not doing a whole lot and gold… after its new high and reversal on Feb 1 has traded sideways and 30 bucks off its highs. I'm not sure what all this means but it might be a good time to take a vacation and get away for a few days. We're actually going up to visit Dave Lewis and his family this weekend. I'm sure there will be many heated debates leaving me with plenty of ideas to throw out there next week. I'm sitting on a modest Dollar Index long position that is basically doing nothing. I sold almost all of it out on the last rally up to the recent highs and I've been slowly trying to put it back on. I've probably been a little early in doing so but after seeing how shallow the stock market correction and "retest" has been, I decided perhaps I wouldn't wait for prices to trade all the way back to the lows. Who knows… it may still yet.

I remain of the view that a number of macro trades are slowly turning around. I still see 2008 as a generally corrective year to what we saw in 2007. That means a stock market that ends the year strong after a weak start. Stocks will begin to anticipate a recovery even as the economic statistics erode toward their lows. Similar anticipation will drive a willingness to begin taking risk back on again in the capital markets, which and, along with continued inflationary concerns will drive long rates up and generate a steeper yield curve. We'll see a stronger dollar and pressure on commodity prices generally. I am not saying the commodity super-cycle nor the long-term Dollar bear market is over. I'm simply saying I think all these markets have now attracted so much attention and hype, that a lengthy, tradable, contrarian opportunity is presenting itself. In fact… the main reason for liking these trades is ultimately the position skew that has built up over the past year.

Of these trades, I think stocks will ultimately prove the best and safest trade. Stocks are a game rigged to go higher. The Dollar is my second favorite as I continue to see 1.50 Euro as a major flash point where real money commercial interests experience exchange rate pain and actually look toward the US as having comparative value. Speculators en-masse may be able to drive prices over short periods of time but it is real-money capital flow that provides the relentless day-after-day price pressure. I also think long term rates will rise as the monetary authorities have clearly put growth concerns ahead of inflation concerns. I don't blame them. They can't control global demographics and it is global demographics that are driving food and energy prices higher.

For now however… the jury remains out as to whether or not any of this will actually develop for 2008. The US economy and the capital markets have had a tremendous amount of bad news thrown at it. Are we over the hump in terms of pain, or will we get another slug to finally drive equities to new lows, bonds higher, and a resumption of other current trends? I have my view, I'm sure you have your own. Only time will tell, which storyline plays out.

For those who still want more to read… I pass along an interesting speech by author Michael Crichton on complex systems. Here-here Michael… I couldn't have said it better myself.

Feb 13, 2008                No Column Today

5:00 AM New York time.  Sorry.  Too wooped this morning.  Got home late.  Had to drive across the entire State in a snowstorm at 35 mph only to get woken up by the wind at 3AM, couldn't sleep, went to the shop, it was pretty snotty at the dock, so I moved the boat to the neighboring cove in 30MPH wind and the pitch dark.  Write your own column this morning.

Feb 11, 2008                 The Bets Are On The Table

6:00 AM New York time. Hmmm… I thought I didn't have much to say on Friday. I have less to say today. I have almost nothing on for positions. My Dollar Index long is trimmed down to BELOW core. The Dollar is in the process of correcting. Some might say it is simply headed back down and that the last rally was the correction. We'll see. I think it's trying to put in a bottom but I'm in the minority. I have no position in stocks either. Were in the middle of a potential retest of the recent lows. We'll see how that goes too. The lead piece in this morning's Journal say's the global credit crunch is widening and reducing the value of securities well outside the sub-prime arena, include all manner of instruments that were used to finance LBO's and takeovers for the last few years. Prices for all kinds of bonds… even securities backed by student loans are suffering. I'm sure this is one of the chief rationales for those who think the stock market and the dollar both have more to go (in this move) to the downside. It is and will be the chief financial topic for the year. I think there's plenty of capital out there but the question is one of confidence and willingness. Something is only worth what someone else is willing to pay for it. The contention of bears is that banks and other financial institutions will be forced to write down the value of all manner of credit instruments. Any underlying derivatives will get whacked too. We will see another big wave of balance sheet write-downs. The ability and willingness of financial institutions to lend will suffer another hit. The credit crisis will deepen and create additional pressure on the real economy. The spiral of declining demand and credit contraction will continue to pull markets lower. Behind all this and echoing through my head is a comment Dave Lewis made to me this weekend in reaction to my description of playing the historical range ends…. that sometimes… we DO go way through the historical bounds… and things DO get THAT bad. It is the issue of the day. So this is where the bet lies. Dave Gilmore and Dave Lewis in the same camp with me on the other side. Who would have thunk it. All one can do right now is play your hand to the best of ones ability… discipline and patience. Is price action truly throwing up a red flag or is this just a pause and correction for a much larger price move? Only time will tell.

One additional observation for this morning… price action in the grains has gotten very interesting too. While wheat has continued to post limit-up moves, corn and soybeans have had trouble following. They have had sharp rallies followed by sharp failures. Intra-day volatility is way up. It's still a little early, but markets are going to start to look at and price in what farmers are going to be planting this year for acreage in both corn and soybeans. The last two years have been demand driven markets in the grains. Production has been good and driven prices lower during the growing season and rallies have tended to commence once harvest is over and we start running down stocks. I expect similar price behavior this year. Even more than last year US farmers are going to plant every possible acre they can this spring.

Feb 8, 2008             Sticking To The Straight and Narrow

6:00 AM New York time. Yesterday was at least a gratifying day. The Dollar Index posted it's third big up day in five and has some asking "breakout"? I myself am trying to treat it more calmly. Like the S&Ps just 4 days ago, the rally in the Dollar Index (led by weakness in the Euro) has garnered a lot of hype but has really only traded back up to it's recent trading range highs. I myself would not call anything a break out. Prices remain below and create a third point on a downward sloping line that connects the both the mid-January highs and the mid-December highs. And just like stocks… AFTER the bounce is NOT the time to be getting excited about getting in. I would be more inclined to take profits here. But like stocks, the retest (whenever that is) of this up move will be more telling for the longer term. Bounces in bear markets are natural and to be expected. Bounces that generate retests which then put in a higher low, are something else altogether. That is actually the point where I become really exited about a trade. That is when we get our first hint that a major trend change could be taking place. That is actually the more important spot in terms of getting the trade on in the right size… where it can make a real difference in your P&L. That is what I will be watching for in the dollar over the next week or two. This is what I am watching the S&Ps for very carefully right now. I was traveling with Gilmore yesterday and had to hear his bearish stock market story all day. While it is a compelling story… I have to keep in mind that last year at this time he was quite adamant about his bearish oil market call. We all know what happened in oil for the rest of the year.

The biggest issue for me right now is getting myself back in to synch with the markets. I need to be able to afford holding on to my core positions, but also be ready and able to leverage back up on weakness and thus ready and willing to leverage back down on strength. You've got to keep your core paid for!! This last month has been the worst period in the last two years for me as far as losing my discipline and chasing markets, only to be taken back out when prices fail, and because of that, less willing to take advantage of subsequent weakness to re-enter. I've had too much leverage at the highs, and not enough at the lows. I've heard it said may times before but it bears repeating… a good trader can make money trading the long side in a bear market if he/she sticks to a disciplined approach focused on maximizing risk/reward and with sound risk management.

Yesterday's close in US stocks was kind of neither here nor there for me. I debated starting to build another long position because it did put in its first up close after three down days, but in the end, nothing about the price behavior during the day got me excited enough to get me to pull the trigger. The rally that came off rumors that the recent ISM services number was incorrect was used as a selling excuse. Basically… I just need a sign from the market that longer-term selling pressure just doesn't have the umffff to drive prices back to the recent lows. I'll be watching price action closely for the next over the next few days for any hints of directional inclination.

I'm going to start looking at the Treasury market again too. Bonds have started to display some cracks that might be foreshadowing something more serious down the line. There's noting I want to do right now but I think the long end has a good possibility of having most of the good news and optimism already behind it.

FYI… and even though I have no position… my observation is that gold acts amazingly well given what we've seen for upside in the dollar. I would have expected a lot more weakness.

Sorry I don't have more to say today. I'm in less of a predictive mode that I am a wait-and-see mode. Have a nice weekend.

Feb 6, 2008             Trifecta Of Unexpecta

6:00 AM New York time. Maybe we're simply in one of those periods where cosmic forces are aligned to keep all of us off balance and have the unexpected keep rolling in. The markets have been neurotic lately with large swings in emotion and sentiment from day to day. The US presidential primary race has had numerous surprising twists and turns. Even the world of sports has left an unlikely winner of the year's biggest Stateside sporting event. Maybe we're building craziness toward the lunar eclipse on the 20th. OK… just kidding.

Markets certainly have from time to time in this young year, left me a little speechless. US stocks were back to thoughts of recessionary gloom and further massive credit write-downs yesterday after seeming to come to terms with the slowdown and stabilization for the bond insurers just two days before. The Dollar staged one of its biggest rallies yesterday on ISM numbers that were to most eyes… shockingly weak. If the worst-case scenario housing market/mortgage-wise was reached on Jan 23rd, perhaps yesterday's sell off yesterday (which may continue today) is busy pricing in the worst-case scenario for the US economy.

I went into yesterday with a core long S&P position, thinking the market was likely to pull back but fairly confident I could hold it… at least for the day. By yesterday's close there was only a third of that core long left. Even in small size… it was painful. The bummer was… the loss from the S&P position completely offset the long dollar trade I brought into yesterday, which performed like a champ. Oh well. Market conditions are the same for everybody and the process of having a good year is a marathon not a sprint. Though yesterday does highlight the advantage of taking short-term contrarian positions and being able to almost completely let them go as price action capitulates. Because of the intensely volatile nature of the capital markets I am going to stick with my lately-arrived-at strategy of trading only the Dollar Index and the S&P 500 futures. Between those two, we can basically make a call on both interest rates and commodities. Why not go straight to the crux of the biscuit.

I still maintain that in the wake of days like yesterday, you need to be more ready to pounce on the long side of the stock market when the market signals short-term exhaustion behavior such as minor reversals. Whether the S&P 500 makes new lows for the move or not, this bear phase represents a historic buying opportunity that will set up a powerful bull trade that one can ride for the rest of the year. The S&P SPDR Homebuilders Index (XHB) bottomed during the first week of January and hasn't come close to retesting. Housing is what started this whole bear market phase and there is a strong case that equity prices in that sector have already discounted the worst of it and have bottomed. We're close… we're real close. I also think that the US Dollar is in the process of putting in an intermediate term-low, which could very well generate an up-trade lasting through 2008. Both trades represent contrarian plays with an underlying and massive position skew the other way. But as we have seen, taking advantage of those trades will not be easy. One has to be prepared to participate and add when things look terrible and prepared to let some go when everything seems to be going the trade's way. I let a small piece of my Dollar Index go yesterday afternoon. I let another small piece go this morning. And I will probably sell one more at some point today. That will leave me with half of what I had coming in yesterday. After that I will need to just be patient and wait for a pullback to reestablish. These are markets that right now, are truly rewarding those who can muster the discipline (and courage) to buy on weakness and sell on strength.

Feb 4, 2008                 A Weekend Of Upsets

6:00 AM New York time. Friday was a very interesting day. Friday's price action sent up a number of red flags. I don't necessarily care about key reversals. I DO care about how markets take and trade on information. So when the Dollar Index, led by it's chief component, the Euro, starts out in as-expected knee-jerk fashion weaker on a loss in Payroll employment, but then reverses to end the day decently lower, I MUST sit up and take notice. Indeed, on such an event, I have to actually take ACTION. So I took another swing at the long Dollar Index trade I've playing around with for the last couple of weeks. The harsh reality is that the dollar has had the kitchen sink for bad news thrown at it the last couple of weeks including two (historically) big rate cuts by the Fed, and it has come through as unscathed as could have been imagined. The Euro still resides two big figures below 1.50. I'm not saying the dollar is putting in a bottom here. What are the odds that a little guy like me could pick any bottom in a huge market like the currencies? All I know is… as I look back on trades that have treated me well, the best ones tend to be those accident-waiting-to-happen trades where the majority of participant base is largely one-way in both position and view, yet the price action has ceased to gratify them, and the prevailing storyline is no longer generating traction. Regardless of your macro view on the US Dollar you certainly can't argue with the last two statements. Only time will tell if this observation is significant and my trade idea will be born out. But if there were any time where one is going to take a shot in decent size, this would be one.

It will be important for price action to start putting pressure on participants over the next week or two. It would be nice to see the dollar react well to a piece or two of good news. It would be nice to see the Euro react poorly to a piece of bad news. There is a very believable storyline out there that the ECB has fallen behind the curve as far a softening its policy stance on what could easily be the start of a GLOBAL slowdown. Data that supports that view would be very welcome. The same thing happened in the US where interest rate futures predicted the caving of the Fed long before the actual event and more than a few times against persistent jawboning.

Stocks for their part were interesting as well. Participants did in fact buy the Payroll dip as I suspected they would. In both that case and during the day before with the MBIA news, the dip was quite shallow and participants quickly seized on it as an opportunity. I mentioned last week, it appears that a great many traditional equity, non-leveraged participants are behind their bull-market investment allocations. As such… to them… the risk that the market has put in a bottom has finally outweighed the risk that this latest rally is nothing but a bounce in a bear market, and they are in a must-buy situation. A big test is coming. The S&P 500 futures have now retraced about half of their down-move since the early December lower high. We also have a significant shelf of overhead resistance between 1400 and 1420. The late November major low of 1418 of so comes in just above current levels. There should be an increasing number of willing sellers from here on up. The key question will be, do they have enough selling power to offset buying interest coming in on the other side, enough to roll this market over a and generate a technical failure. As skittish as this market is… such an event could have participants running for the exits again on the view that the bear market is not over. There is plenty of negative news floating around waiting to be seized on as rationale.

I myself am going to let the market keep me in or get me out. To that end my strategy is simply going to be one of exit on failure. If there is enough buying power underneath, then even if the selling pressure from above is substantial, buyers should be able to absorb it, price action up against resistance will result in a stall only. Price action will be back and forth but no serious damage should result. Obviously the cause for concern would be if we had a big failure day… something that displays have more to go that buyers have money to spend. Unfortunately… you never know what the outcome will be until it happens. What I may do, just to be conservative, is to lighten up a little, thus taking the pressure off me to chase lower prices if the market doesn't hold. The risk (as I have alluded to in earlier pieces on this very topic) is losing my position. A common problem in a market that has turned around sharply and left even bulls nervously skeptical.

Feb 1, 2008                 Self-Fulfilling Prophesy

6:00 AM New York time. Ahhh… the stock market. There aren't many markets that have such great potential for self-fulfilling prophesy as the stock market. The higher it goes the more professionals get put into the situation of being behind the 8-ball and HAVING to buy! Gold goes up… a hedge fund trader can let it go. The dollar goes up, an FX trader on a prop desk can let it go. Stocks go up and you're an under-invested professional… you BETTER get in there and BUY something! At this point I'll bet you there are a whole bunch of passive money (mutual fund/pension/endowment/insurance) money managers hoping beyond hope for a weak Payroll number so they can buy their names on weakness. I'll seriously consider being a buyer too. If stocks have TRULY bottomed I want to get longer still.

The news topic that has been swinging the market wildly has been the bond (MBIA/Ambac) insurer news. Yesterday the MBIA conference call was clearly the catalyst for the optimism. Tomorrow… who knows? The main thing to keep in your mind is the underlying reality that the game is in fact… rigged. Why would the ratings agencies still have a triple AAA rating on the bond insurers who stand behind so many sub-prime CDOs. C'mon… who are you kidding? The NY State insurance Commission is involved. The NY Fed is involved. Big money investors (Wilber Ross, Warren Buffett, Warburg Pincus) are involved. The stakes are simple and incredibly high. If the bond insurers maintain their AAA rating and adequate capital, then the majority of write-downs for Wall Street firms are probably behind us. If they don't… then there will be another huge slug of write-downs to take. We are looking at the issue of the year, which in turn could possibly generate the trade of the year. In a market that is ultimately influencing price action in all other markets. That's all.

Yesterday, fear of the downside was replaced by fear of missing the bottom. There is no way to know if yesterday's rally was the last gasp in a panic-back-in bear-market rally. That alone makes me nervous. The thing I try to stay focused on in stocks is that the pool of capital wanting to get in once the psychology turns is MASSIVE. By far the biggest risk is getting out too early and losing my position. The way I plan on dealing with this dichotomy is through money management. I'm maintaining a bullish bias… but am willing to let some of my position go on days when I think sentiment back up has gone too far. I never let the whole position go, but I'm also better prepared to add back when the inevitable swing in short-term psychology turns prices back down again. Essentially… I'm in survival mode. As long as I try to pull a little money out each time, and maintain a minimal long position… I'm OK. Today we get Payrolls. Per usual, I have no bias on the number, but I am prepared for the outcome either way. Right now, I have on that minimal S&P position so I'm in position to buy. If there is a weak number I'll be looking to add. If the number comes in strong I'll just let things ride. The one observation I will add to this whole simple strategy is… the corrections the last couple of days have seemed to get shallower and shallower. To me that is confirming price behavior that psychology is turning. We'll see.

In other markets, I took another shot at long Dollar Index yesterday. The March DX took out two prior lows on Wednesday after the Fed rate cut and really didn't follow through. I even thought we had the shot yesterday for a failed new low though by the close that was not clear. We also have two prior significant lows in this 75.00 neighborhood going back to November. The significant price action observation is that DX didn't trade all that poorly for the Fed cutting 125 basis points over the course of two weeks. And I think the ECB will eventually be forced to cut rates to aid their own slowing economies. I am hoping that story line might start to creep in and gain some traction but the interest rate diff is very wide and that is a relentless attractor of real capital. Right now I'm not too confident with this trade. The most attractive thing about it is the risk/reward and the fact that if I'm wrong, I'll be out shortly without having it cost a lot of money. My hopes are not high. The main component of the DX, the Euro, seems to gain strength lately every time stocks rally. So being friendly on stocks makes me nervous about long DX. Perhaps participants perceive the better US stocks do the more they pull global equities up, the less pressure is on the global financial system and the less the ECB has to consider cutting rates for systemic reasons. Whatever.

I also bailed my long cotton. I have grown to hate that market. It has chopped me up pretty good in the couple of attempts I have made at being long. I just don't like the way it trades and having a long commodity position that aggravates me WITH my bottom picking in the dollar is just too much for me to reconcile right now. I want to focus on micro-managing just a couple of trades right now. I'm keeping my long sugar right now however. That trade is very small and continues to earn its keep.

Jan 30, 2008                 A First Whiff Of Spring

6:00 AM New York time. We may live in a generally urban state, but we live in a fairly rural part of it. We have actively farmed fields all around us. So we get some decent glimpses of wildlife fairly often. And even though it's only late January, I heard my first Spring bird call yesterday morning. It wasn't a White Throated Sparrow (a dead on Spring giveaway), but I recognized it. Later, I took advantage of the light winds and mild temps to get out on the water. Sure enough, we have an Anthrocladia algae bloom on. Slip-gut we call it and it is the first algae bloom of the Spring. From the depths of winter comes the first sign. Sound familiar?

I felt like I left things dangling after my Monday post. If I gave you with the impression that predicting the future direction of trends in complex natural systems such as the weather or… the markets… using even the best empirical evidence we have, is still for the most part an impossible task… that is mostly right. Especially the farther out we try to predict. But what IS constant… and what I only alluded to… and what is ALWAYS on display… is our collective HUMAN REACTION to events around us! The constant in all of this incredibly noisy cyclicality is that we (as a group) tend to reach a climactic emotional peak as we reach historical extremes. It's a natural human reaction. Change generally scares us. So the tail ends of our collective range of experience threaten the possibility that we are about to "break into new territory". THAT is what is on display each and every day. THAT is the constant. And THAT is what we need to play off as market participants looking for profit opportunity. Perhaps… some day… we will collectively, in enough critical mass, reach a point where we can be self-aware enough to recognize this behavior and work to counteract it. While that will not bode well for our current capital market system, it will be a wonderful thing for the human race, and one that will help us greatly in our intellectual evolution as a species… to whatever end awaits us.

Another couple of days have passed and stocks are still hanging in there. As I look at the evolution of events, I'm starting to feel even more friendly to them. There remains a decent amount of nervousness and trepidation among pundits collectively regarding getting back in. There seems to be less and less negative reaction to bad news. UBS reported a big loss today from sub-prime just as Citi did a couple weeks ago. Eventually all the financially involved companies will report, take their lumps, and move on. Citi is still in business and doing business. What's more, the whole sub-prime-loss mess has spurred even deeper cost cutting efforts. While that does not bode well for FXA's business, it will greatly improve prospects for the bottom line of these companies once write downs are behind them. I will never forget one of my first market-related cathartic experiences back in the nineties watching IBM as it traded down to an unheard of $50 (it has been split twice during the nineties). They announced a massive layoff and participants pushed the stock down through 50. But by the end of the day, the stock had recovered and it has not visited those levels since. I think, in our current situation, when we look back in hindsight we will realize that not very long ago there were people making dire predictions of collapse of one or more major commercial or investment banks, along with dire consequences for the financial system itself. Today, those predictions look a bit too extreme. How will they look a month from now? When we weigh emotional extremes, we need to do it in real-time. At the time the dire predictions seemed not far from reasonable. In reality, calling for a collapse of the financial system is way out there. A higher odds bet is that the sub-prime mess will be worked through and even firms that were deeply involved will survive and move on.

Today is a big day. I'm not sure what the Fed will do. I understand the rationale for expecting 50 basis points given that there is no February meeting. I don't think it matters either way. If the cut is only 25, I think stocks get sold on disappointment. If they cut 50, I think stocks sell off on a "sell the news" trade. I am leaning toward holding on to my current S&P position and looking to add another unit on the dip. It's probably going to get a little hairy… but then again… that's what we get paid for. There are some times when one just has to step up and be counted. In other markets, I have put my dollar-bullishness on hold for a bit. The dollar acts poorly and we are very close to new lows in the Dollar Index. If it can hold in through a rate cut, stay above the near-by lows and even recover, I may take another shot. Even better… if the Dollar Index makes a new low and fails I may take another shot. But one of these behavioral conditions has to happen first. In the meanwhile… I guess I should be happy because it will at least be currency-supportive for my long sugar and cotton positions.

One last thought on politics. As hard as it is to believe, it looks like John McCain is going to be the Republican nominee. McCain is simply Bush wearing a different suit. And since (I think) Americans are fed up with Bush, that means we're going to see a Democratic president, which means either the first woman or the first African-American. History gets made either way. I like seeing history get made.

Wait… is that a White-Throated Sparrow I hear?

Jan 28, 2008             The Prediction of Chaos

6:00 AM New York time. I'm following the plan I laid out last week of letting go of my stock index long position when the rally fails, and looking to reposition on the retest. It's pretty obvious that retest is under way and will take place over the next couple of days. On Friday, when it became apparent stocks we're failing (to me, about noon) I sold my position. I made decent money on the trade. We will now see if this roll over is indeed a retest or if it will simply be just another case of new lows, leaving the bear trend intact. Again… and for the record… stocks are a game rigged to go higher. Anytime to have an opportunity to buy them on extreme weakness, history says you should. We are only now wrapping up January. We have 11 more months to go and I think by the end, it will be proven that stocks presented yet another historic buying opportunity. You can make the case that global stocks could follow the decade long Japanese bear market model… but I would simply counter that the Japan case is a rare one amid countless other recoveries and examples of renewed bull markets. I also maintain that the dollar too is vulnerable to a substantial counter-trend move higher. Bond yields have also fallen to levels that represent a tradable counter-trend opportunity. But the latter two trades are highly dependant on equity market performance and have little chance of germinating until stocks stabilize.

I have also said before and I will say again, I will not let myself fall into the extreme-case gloom and doom camp. It is a compelling case when all seems dark. But I believe the vast majority of life operates within that one standard deviation either side of the mean, and it is very rare indeed that we see a spike much through those historic extremes. It can happen… sure. And maybe it will happen in this case. History says however, that it is simply not the high odds bet to be making. I have fielded calls in the last 10 days from two-out-of-three siblings asking what I thought of financial market events. My siblings never call me about that stuff… then twice over a very short period. It is yet another one of my incredibly simplistic, totally arbitrary, possibly meaningless piece of anecdotal information, telling me that we are finally getting into real-worry territory.

I have wanted to talk about two topics for a while that speak to the chaotic nature of lif