Could Be A Rough 4Q
Posted by moolahtime on October 23, 2008
A day like today gives me a severe headache and confuses the heck out of me. First of all, the market opened up +100 pts, then rose to nearly +300 pts, then down nearly -300 pts, and finally finished +172 pts. The last few minutes was crazy…-130 to +130 in a matter of minutes.
It’s tough to trade in this environment, unless you are well adept with options. I don’t want to give out too much options trading advice as it could be risky, especially if you are not familiar with the techniques. So, better to stay on the sidelines and sell into strength like today. Today, as much as I think gold stocks are ripe for a surge, I sold them at breakeven. I maintained my positions in both GLD and SLV since they are ETFs and not as volatile as the mining companies. I also sold some shares of MCD and WMT to monetize the gains since I think the blue chips will go down some more before plateauing. The issue that we are all encountering is that the hedge funds are still unwinding their positions across the board (the most liquid first…hence stocks) due to redemptions. Also, nothing is improving from a fundamental and economic standpoint. Banks aren’t any better off (still no credit…I see it firsthand at the investment firm I work for), Chrysler says it may go bankrupt, GM is burning through a billion dollars a month and has enough cash for next 1.5 years max, home foreclosures are still soaring, massive company layoffs across a variety of sectors, jobless claims in the US increased to 478,000, Russia halts trading on a regular basis and is losing foreign investment commitments, Dubai has asked for a loan from Abu Dhabi (UAE), EU has instilled a massive bailout plan but Germany wants to do its own, gold and silver are tanking despite the current environment….shall I continue? I think you get the point.
If we do not have a substantial rally to allow stocks to break out of their trading range in the next few weeks, I think the fourth quarter could get ugly due to “performance gaming” by the hedge funds. I have been familiar with the concept but learned the term today in an investment letter I subscribe to. Performance gaming is a term used to describe the closing out of losing positions by hedge funds to artifically improve their short term performance. The SEC requires fund managers to publish their existing positions at the end of each quarter. Remember…existing positions…not divested positions. So, right before quarter end, they sell off losing positions and improve their cash balance. So, on face value, it appears they only have winners and a lot of cash. Sounds like a good situation, right? This is only a short term tactic, and it catches up to them when they report full-year performance. Most of the selling to date has been a result of redemptions. So, the combination of investors continuing to pull money out and these hedge funds desperate to improve their performance in any way possible (even if it is on face value only) could result in plenty of downward pressure towards the end of the fourth quarter.
Not sure if any of you purchased some SRS, SKF, and/or SDS, but they have had a great few days. If you have bought them, you might want to think of realizing some gains. I did as no one goes broke making a profit. It’s volatile times which means the long-term investor continues to get pummeled at the moment. However, I think stocks should be higher five years from now unless we enter a period like Japan has been experiencing. If we do, stocks will stay flat and dead for at least the next few years. If you see some high quality stocks that look very cheap, think about selling puts as the premiums are high right now. Effectively, you collect a premium in exchange to possibly owning the stock at a lower level. I am thinking about doing so with stocks like WMT, MCD, and MSFT.
Here is an article that is absolute comedy. Apparently, San Francisco (beautiful city and great food…if you are ever there, be sure to eat at Parma Ristorante in the Marina…great eggplant parm) is looking to name a sewage plant after good ole’ Dubya.
Well, I am off to get a workout in. Chat later.
ciao,
Moolah
