Thursday, October 9, 2008

Questions and Answers

I have received quite a few questions over the last few days given the market action of late. I thought I would respond to them, publicly, via the blog so they and others could benefit or disagree if they choose. Some may find this simple, basic or redundant but I thought it worthwhile for those that took the time to write in.

D.S. asked.... Why are gold equities selling off so hard?

I believe the primary reason gold equities are being sold due to margin calls. This along with the energy sector was one of the few areas market players could actually find a bid for to sell to offset margin calls let alone mark market losses yet to be realised. Many players in the markets are so extremely over leveraged that a small landslide can expand to full blown avalanche. Better to stand aside, stops help in this matter, avoid the oncoming locomotive and look for a more advantageous entry point.

E.W. asked.... How far do you envision major market indices dropping?

You have to be careful with this one for if you predict, say the S&P to double you immediately qualify to be a Wall St. strategist whereas you predict it to fall in half and they send the men in white coats. That being said, I firmly believe we are coming out of the mother of all credit bubbles which was global in nature. Markets tend to swing to extremes for that is human nature euphoria to depression. I see no reason to expect this drop to be much larger than many of the expects predict. I keep hearing the markets have fallen 20-30% so it is time to get in. Don't fall for this for as far as markets can swing to the overtly optimistic side they can EQUALLY fall to the egregiously pessimistic side. This is fact, not bias. Yes I am short with trailing stops but until number like 1325 and 1450 on the S&P are taken out to the upside everything else is noise.

I am sorry to say this but it is what the tape is saying.

R.L. asked....Are you still in the deflation camp given all the liquidity injections and if so, why are you long gold?

Yes I still am. I am no expert in this area but given our fractional reserve system, unless these injections are lent out and the multiplyer effect allowed to take hold, cash is deflationary. The debts written over the last few years are being defaulted upon, hence capital is being destroyed faster than it can be replaced.

I am long gold because it helps me sleep at night. I also believe that at some point this deflationary cycle will run its course, and all this liquidity will hit the pavement creating dare we say a hyperinflationary environment. We are a long way away from that but I am very content to hold gold. The other reason I am long gold is because if you happen to visit your local coin dealer you may find that he/she is out of Krugerrands, Eagles, Buffalos, Kangaroos, Pandas, etc. You may also find it very difficult to find 100 oz. silver bars. This may be something, it may be nothing but I am not prepared to be ambushed by it being SOMETHING !

You can call me names after reading this if you want but forewarned is forearmed.

M.A. asked... I keep hearing over and over again to leg in or to average into this market, is this sound?

Many financial advisers, always playing with others money recommend this strategy also know as dollar cost averaging. As I have said before if averaging down worked, Nick Leeson formerly of Barings Bank, the former bank of the Queen of England before he took it down averaging down into Nikkei futures, Nick and Barings would be lord of the manor. Instead he went to jail, the bank is gone and the Queen is the Queen.

I have a sheet of paper posted over my trading terminals that serves as my daily trading reminder. It says only 3 words, "losers average losers".

Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".


Open Positions:
Long 2 units of Ultrashort S&P ticker SDS @ 61.75 stops at $81.89/$76.91
Long 2 units of Ultrashort Dow ticker DXD @ $57.85 stop at $72.69/$67.89
Short 1 unit Int'l Bus Machines ticker IBM @ $129.05 stop at $104.89
Short 2 units of Apple ticker AAPL @ $178.05 stop at $102.21/$107.31
Short 2 units Salesforce.com ticker CRM @ $56.05 stop at $38.71/$42.12

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