Responses to Comments

I received a lot of comments last night after the close so I'll just respond to them all in 1 post here.

First, let me preface this by saying, these are simply my opinions and I am wrong 49%-51% of the time. There are many thousands of factors affecting the market at any one point, most of which we never will know about, see, touch, or hear about.

JeffreyC: Mark: I think this market acts like a manic-depressive. One minute suicidal, next minute euphoric, next minute despondent, next minute on cloud nine. But remember, these are all "PROFESSIONALS" running the show, at trading desks, running hedge funds, managing billion dollar portfolios... so we little folk have NOTHING at all to worry about.

Answer: Humans are humans. Herds are herds. Computer algorithms are programmed by humans. Etc. Fear and Greed never leave people no matter what level of degree they have. I call this the bipolar market and it has been for a long time. With the advent of computer trading dominating the markets (70% of all trades), and the first bear market since they truly took, I think it simply adds to the volatility. Then throw human fear and greed on top of it, and it's a heck of a brew. And stop ripping on professionals, thats my goal one day! :)

T-Rader: that same market pundit, it its who i think it is told people to keep their money at bear just last week. http://www.businessandmedia.org/articles/2008/20080317110946.aspx

I don't have a problem with anyone being wrong; god knows I screw up a lot - just like the best baseball hitters fail 70% of the time, the best investors fail 40% of the time. What gets me is the change in assessment literally by the hour. Now, one needs to be flexible always. In a market like *this* one needs to be even more flexible. But to pound the table on something (ag) at 52 week high than a week later when it falls 20% to be bearish is annoying. I still remember in August he was pounding on Foster Wheeler when it was at its lowest point, than when it rebounded 30% after the market rebounded he was on the bandwagon. Par for the course.

Guy 24 hours later and I am back to whistling my tune and that is: market participants are not counting on a prolonged downtrend ala Spring, 2002 or 1974. The market is oversold and sentiment is bearish and the Fed continues to throw money at the situation and the market is SUPPOSE to go up - it did everytime this trifecta of events happened from 1982 to 2007 (except 2002). I don't know which way the wind will blow tomorrow, but I do know this: ever since there was a break of weekly support on the SP500 (2 weeks ago) and the NAS (4 weeks ago) there has been increasing chance of a continued sell off. As I don't boast or make predictions, my interpretation has been to reduce exposure and wait for confirmation as oppose to speculate on a bottom. I speculated 6 weeks ago and lost that battle!!

Guy, my contention is this is the first consumer led recession since the 70s/early 80s. People are "used to" corporate led recessions (if you even want to call them that) of 90-91 and 01-02. Those were narrow, shallow - mostly due to Federal government (bailouts in 90-91) and Federal Reserve (kicking can down the road with easy money). Further they were again led by corporate weakness. This is the exact opposite. Further, I believe we are in a secular change where the US begins degrading as a world power. Not due to its people but due to it's policies - massive entitlements that we cannot pay, lack of good primary education, lack of energy policy with any foresight, global wage competition, overpriced living costs in housing (just imagine how much easier life would be if we could devote 30-35% of our salary to a roof over head instead of many people 45-50%), lack of savings, huge debt load, living past our means both as individuals and a country, lack of retirement savings, jobs that don't pay many in this country at a level to offset the high (relative to world) cost of living. Etc. Many of these things could be cited 2-3 years ago or heck 6-7 years ago... but it was masked by easy credit and housing boom, and before that tech bubble. And it's cumulative - it adds up over the years. Eventually the bill must be paid. And we do not have a leadership that looks past any 1 election cycle so you cannot make plans for 20-30 years out if all you care about is 4-6 years. Doesn't mean we are doomed but just because a country was the power for the past 60 years, doesn't mean it will enjoy the same status in the future - we assume the past will just continue the same and without work we will be end all, and be all. There is a lot of global competition now, with many hungry governments, many which are forward looking (see what Dubai is doing, not to mention China), with many hungry people. So this is a whole new world, and while Wall Street will be fine I worry about Main Street. That said, I am worried and have been for a long time for all corporate profits levered to the US consumer. As corporate profits plunge as "2nd half recovery" goes away, so will stock prices. When housing becomes a smaller % of expenses after a needed correction (through lower prices that the government is trying to fight) than maybe things can return to somewhat normal.

shaxmatist
Feeling your pain buddy. This commodity selloff came out of nowhere. Didnt we just have a major rate cut yesterday? And the market dumps hard assets?

I am not really surprised, except on gold and silver to be honest. I would not say it came out of nowhere - these are VERY crowded trades and as I've been saying for a while now, there is a lot of hot money in these trades as people fled equities and a lot of "new money" to boot. After reading a lot of items last night I think the best proposal was simply put we might have a lot of deleveraging going on after Bear and Carlyle Group - so many of our hedge funds appear to be levered 20:1 to 30:1 and hence so much fake buying power has been created over the years - once those calls come in, and funds must cut back you see some exaggerated selling. They can't sell their stupid mortgage backed securities so they sell this stuff. And once the herd all tries to exit the room through the same doorway, you get this type of action. Welcome to the world where hedge funds dominate the volume. Remember, commodities markets are TINY compared to equities. The long term has not changed, just the current. With the dollar reversing (another VERY CROWDED trade - to bet against the dollar) - it causes all the other trades to unwind.

T-Rader
what did you expect? i don't know if you realize this but today is Wednesday and not Tuesday. and i think Charlie V is on vacation

it seems everybody and their mom got really bullish all of a sudden. how do i know this, even you were bullish. everybody bullish = bearish. it seems to pay to have a contrarian approach in this market.

That teaches me to be bullish even one day of the past 90. p.s. It is Charlie G, not Charlie V - I don't recommend getting those Italian guys peeved at you ;)

Michael
What worries me about this current market is the amount of cash that has been pumped into it. I'm starting to wonder that even if you pick the right area (agg for example) it's going to get hammered with everything else as the money supply eventually gets cut back. Problem is that I think staying in cash right now is just as bad b/c of the real 10%+ inflation. Looks like I should've done the irresponsible thing and spent 80% of my income on a house 2 years ago. Grr!

Michael, 3 good points. #1 moral hazard is thrown out the window in this era. Just wait until the speculators err... home owners get bailed out in the end. We are not done with the bailouts. #2 The Federal Reserve is doing everything in their power to get that cash out from under your mattress or savings account. First, you get no return in savings account and real return (adjusted for inflation) is negative. Second, inflation off the chart so they want you to move into risky assets since they are making cash trash. #3 Money supply won't be cut back from the powers that be - the open question is how badly does leverage get cut back - but that's more a crisis of confidence. Not a money supply issue - everyone appears to be levered 30:1 to 20:1 and since its almost all unregulated, our "shadow banking" system poses major systematic risk. The minions have evolved to a higher form while our regulators are still stuck in the 1980s.

carotid
Do you think this is the beginning of the downtrend in commodities, oil and gold? Are you concerned about so called deflation? Your portfolio is heavily weighted on commodities right now. I am concerned about my DBA exposure which broke support today.

By the way, thank you for all the great posts on your blog.

Carotid - I'll take my heavy commodity exposure as a compliment. Where would one of rather have been the past few months? Financials? Consumer related? Retail? Etc. It's been the place to win so I am happy I had exposure there.

re: DBA - someone asked about that 2 days ago - I will give you the same answer - it's about time frame. If you have a few day time frame you are at risk. The long term has not changed one bit. Just the level of speculative buying power has.

re: is this the end of the commodities? Hardly. I am a big proponent of a 'World of Shortages' - macro long term themes. On top of that is worldwide inflation helped along by central banks. Neither has changed - only the level of speculative fervor has. Stock prices (and commodities) go up or down for many factors - it can go up or down 25% in a week. Doesn't change my long term view. A much needed correction is happening, and one that I have been calling for. Again, the gold/silver has surprised me as to the degree of correction but the rest has not surprised me. It just shows you how much leverage is in the system and how much unregulated pools of money are running things. I wrote about this in [Feb 28: The Hedge Funds are Coming! The Hedge Funds are Coming!] - frankly they are locusts - they come in, feed, ravage, pillage and ruin any market. Orderly markets act disjointed - ask the wheat traders who have been living in a new reality the past 6-8 weeks - many are blown out of the system since risk has exploded of late due all the new players with their funny money blowing into town. Now they appear to have so much buying power, with so much leverage (30:1, 20:1) I believe they have reached a size they are now able to have that effect even on the general equity markets, which are huge compared to the small commodity markets. Hence this extreme volatility when they are forced to unwind trades.

re: your portfolio is heavy on commodities.
Other than coal I did not enter this week heavy on commodities in my opinion. I had about 3% precious metals exposure, 5-6% fertilizer, 5% crops, 3% metals, etc. I am not a hedge fund nor am I a daytrader. So I am not going to completely exit positions I believe in, in the long run. Let's use Mosaic (MOS) as an example since it's my favorite position. I've had it at 6-8% weighting during times I am extremely bullish (i.e. the stock price is low) and 2-3% when I am not as bullish (i.e. everyone is jumping on board and stock price is high). Do I ever sell out? No. I am not talented enough to know the exact moment all the lemmings will jump out of a position, so I can sell at the exact top and get back in at the bottom. So I keep my core stake and then add during the selloffs and sell to the Johnny come latelies when everyone is bullish. I sold much of my position near $110, and now can buy back yesterday around $100 (in smaller scale) and today around $90 (in large scale). I am pleased with that. But aside from coal I did not have a large commodity exposure relative to where I've been in the past. Again, I've been in these trades a long time. I was a fertilizer bull a year ago for all the same reasons people are today (before the market recognized). I was a coal bull early last fall for all the same reasons people are today (before the market recognized). I am trying to find trends, be early, and I can't control the day to day speculation. I don't see any change to the long term fundamentals, so again, I weigh these positions more heavily when people flee, and I weigh them more lightly when everyone is piled in. Doesn't mean I do not get hurt on the downturns, but again as a "mutual fund" I am not going to go to 0% exposure and 90% cash - even if I was smart enough to know how to time things to that degree. Maybe a lot of people come to the blog and don't read the history and think I just piled into all these positions because hot money just found them the last 6 weeks. Not the case. This is not the first correction nor the last in the space - I said I would not be bullish until these names started falling many times in the past most recently [Mar 6: Waiting for the Leaders to Fall Before I Buy in Scale] I wrote

Now the commodity complex is obviously running the show - our leadership is fertilizer, crops, coal, natural gas, mining, and gold/silver. I'm happy to say despite some blow ups in the bottom of the portfolio, having a focus on these groups (ex-natural gas which I totally missed), is keeping us doing quite well.

But this also leads to the problem... while these are my favorite groups; they are also the most prone to getting hit hard in a downturn (since other groups have already been hit very hard). This is what happened in mid January - many of my stakes in such names were getting hit for 8-9% a day, every 3rd day. Does it mean it has to happen again? No. But I am assuming it will. And in fact I cannot get very confident about being more long until I see these groups get hit. The popular term is "the generals must be shot".... i.e. the generals are the leadership. So despite having the best fundamentals, and no legitimate reason for being sold off, they will - if this correction scenario I envision plays out - get sold off. And potentially very severely. It happened in August 07, it happened in November 07, and it happened in January 08.

So it is now coming to fruition - this is my game plan. To buy when it happened. So I am buying. Without a game plan you have nothing.

Pankaj
Mark,

Since you are a Ron Paul fan, I have one more idol that I just stumbled upon today, who we can praise for telling the truth!!

http://www.youtube.com/watch?v=qaSuL9L_G2w&eurl=http://www.nationalbubble.com/our-country-is-going-bankrupt/

Cheers...

Already have it covered. He was a good man and told the truth. Therefore he has no place in our government. He is now out of government... [Feb 25: I Didn't Realize US Comptroller Resigned] We continue to put our head in the sand and ignore reality. We are reactive, not preventative and just like the tech bubble, housing bubble, until it explodes we will not react. We only act in crisis and this continued behavior allows the rest of the world to catch up, and eventually many will pass us. Do you realize the Iraq War costs are an "off balance" sheet accounting in the budget? That's how they do it - it doesnt really count because its not part of the real budget. But we're already at $600 B - which would of gone a long way to completely solving Social Security. Oh well. Sheep elect these people - sheep get what they deserve; hell many sheep don't even vote in this country.