Financial Turmoil Raises Worries of Deeper Recession

It is funny to watch the masses turn to your view, over time. Last fall during the September/October "Fed will save us" rally I was typing almost daily that I had no idea why the market was rallying into the face of the coming financial crisis & recession. No investment bank economist even dared say recession until December 2007, and even then most pundits began the "2nd half 2008 recovery theme" all over the media. I shook my head through it all. Still do. I could STILL be wrong about a deeper, and more severe consumer led (regional) recession (first since early 80s) I see coming BUT some other minds are now jumping to my long held theory - joining Grantham, Soros, Robertson, Roubini, Schiff, TraderMark ;) (what a group!) [Feb 18: Jeremy Grantham has Some Sobering Words for "2nd Half Recovery: Crowd]

Now I must say, this is what the market SO difficult. Me, and my crowd above, could be dead right but it doesn't mean the herd on Wall Street will take the market down - as long as the HERD believes in the "2nd half recovery" and/or their constant commentary of "everything will be fine in 6 months" (a line they have been using since early August 2007) we will continue to get these Kool Aid rallies. And that is why investing is so difficult - you have to predict the herd... which is unfortunately (in the near and middle term) more important than reality of the longer term. So even if you are correct on the 2nd half being a dud, it does not matter as long as the herd believes it. And this is why we get such abrupt changes in the market direction - we deny deny deny... and then when something so huge hits that one can no longer deny we change 180 degrees on a dime, and panic sell. And keep repeating the pattern. Guessing when the mood changes from denial to reality is impossible. And it happens literally overnight.

Anyhow, in this article I was bemused to see the Greenspan comments. 4-6 weeks ago he had a 50/50 chance on the US even entering a recession - now he says "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II."

See this is the way of Wall Street - until the bad stuff hits them square in the jaw, they deny deny deny. Everything is about hope. Because hope breeds more transactions and in the end it's all about a used car salesmen (see all those mortgage backed securities dealers) with MBAs selling stuff. It is hard to sell stuff when you bring reality to the table - so you bring hope... poor Alan doesn't even work on Wall Street but even he has been infected with the hope trade. Now, what I *can* see happening is this scenario - the "double dip recession" - the current recession (regional), and then the government stimulus plan bringing us back to positive GDP in 2nd half 2008 where every market pundit in the world will say I TOLD YOU SO! And then we move back to our normal programming of recession in very late 2008 and into early 2009. But again, I already called for another stimulus plan coming the minute the last one was announced, within a year... so they will continue to spend money to keep the business cycle from happening. So depending when THAT stimulus plan is sent to us, I will hold off on making any longer term predictions past Q3 2008. Maybe they will send us $400B in the next stimulus plan... I mean all it takes is printing money. That's not inflationary by the way ... and now that the Federal Reserve has put the world on alert its going to fight inflation, you better sell your gold. ;)

But don't worry folks, the unemployment report (per our government) says things are fine - heck below 5% - I have no idea why people in their 40s and 50s need to move back home with their parents in unprecedented levels (let me assume their parents grew up during the Depression and have their home completely paid off - unlike their overconsuming kids who spend 110% of their income each and every day because they "deserve" it.)

• It's been almost an article of faith: Any recession this year will be mild and brief. But now the stunning meltdown of a top Wall Street investment bank and stubbornly persistent financial market turbulence has called that into question, raising fears that severe problems in housing and the nation's bedrock financial system could cripple the economy and wallop many millions of Americans. (no the first article of faith is there will be NO RECESSION, this is just a financial issue that will solve itself with a few write - offs; only in the past 2 months have we moved to a "mild and brief" recession and "everything will be fine in 6 months". But the word FAITH is accurate - instead of using logic, if you use hopeful wishing, people in NYC hope they can get their desired result)
• No less an authority than former Federal Reserve Chairman Alan Greenspan wrote this week that "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II. (He sounds like he is stealing direct from George Soros)
• Other noted economists are also sounding alarms. Harvard professor Martin Feldstein, the former head of the National Bureau of Economic Research, said recently he believes the country is now in a recession and it could be a severe one.
• A growing number of private economists already have a downturn figured into their forecasts. They are generally calling for a mild recession that will end this summer when the economic stimulus checks going to 130 million households start getting spent. But the severe credit crisis that erupted last August -- and claimed its biggest victim this past weekend with the forced sale of Bear Stearns Co. -- is raising doubts about those mild forecasts.
• More turbulence is expected in coming weeks because there remains a great deal of uncertainty about how many more victims the credit crisis will claim. (I believe the next wave of damage will be the hedge funds - this volatility we've seen the past few weeks is the type that will knock out over levered funds left and right; we've seen a few go out lately like Carlyle Group and Peloton Partners; even Goldman's flagship Alpha fund is having a terrible time of it - if the smartest guys in the room struggle, a lot of "me too" hedge funds must be getting smashed - especially as the commodity trade they piled into blew up on them last week - they are nothing if not momentum chasing locusts. But don't worry folks, and please don't shed any tears - these failed hedge fund managers will get a new round of money and they can start anew in 2009. Because they are just that smart - after all this was a once in history event - just like the last bubble, and the one before that, and the one before that - could never ever happen again. Until 2013)
• "We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."
• David Wyss, chief economist at Standard & Poor's in New York, said he now has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover this summer, helped by the $168 billion in tax relief, only to quickly slip back into a downturn. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period. (Agree!)
• The worst recession in recent decades, in terms of lost output, occurred in the 1973-75 period of oil shocks, when GDP fell by 3.1 percent, followed by the 1981-82 recession, when GDP dropped by 2.9 percent.
• By contrast, in the last two recessions output fell by 1.3 percent in the 1990-91 downturn, and a tiny 0.3 percent in the 2001 recession, making that slump the mildest in the post-war period in terms of lost output.
• While they are developing worst-case-scenarios, Wyss and other economists said they still believe the balance has not tipped from their more benign main forecasts. One thing that gives them hope is the expectation that Congress and the Bush administration, having acted so quickly to pass the first stimulus package, will move quickly, especially in an election year, to pass a second package if needed. (Bingo again guys - I see a lot of people have been reading the blog hah)
• Also, analysts said the Bear Stearns crisis, which has already prompted the Fed to move more aggressively, will also probably trigger a bigger response on the part of Congress and the administration in offering help to homeowners to keep them from losing their homes because of mortgage defaults.

All these variables make it hard to predict the future economy - as I said, with all the King's Horses, and Men passing future stimulus plans and buying up mortgages direct, we could have a very different outcome than I state now. After all, when the tax payer takes all the losses (or the taxpayers grandchildren I should say) we can keep kicking the can down the road....forever? Or at least until foreign governments stop buying our Treasuries. But maybe we can keep doing this for another full decade. Or at least until the next crisis in the middle 2012-2013 level where we will blame the policies of today for that unraveling. And issue more paper currency to bail us out of that crisis.

Notice a pattern folks? As Ron Paul says... we refuse to take our medicine. So the inevitable day when the medicine must be taken, I hope we are not giving those drugs to a cadaver. Each iteration of the disease takes even larger amounts of drugs. Eventually the level of needed "treatment" will kill the patient. But let's keep kicking that can down the road. And trust me, all this will be forgotten in Q3 2008 when the GDP bumps due to the rebate checks... because ignorance of long term issues is the way to play - just keep kicking the can and keep creating paper money to solve all our problems.

A Historic 9 Days for the Federal Reserve

I've kept writing since a week ago Tuesday, these are some of the most incredible moves we have seen by the Federal Reserve. Even though we've discussed them a week ago Tuesday [Mar 11: Fed Rides to the Rescue], last Friday [Mar 14: Bear Stearns Getting Secured Financing from JP Morgan and NY Fed], Sunday evening [Mar 16: More Fed Actions!], and even Friday when the Fed put a cherry on top [Mar 20: What the Banks Want the Banks Get - Fed Expanding Junk It Will Take In] - it is worth putting them all in one story and for those newer to the market realize the historic level of "free market" interference that is happening. While Wall Street equity traders cheer (as they get their tax payer backstop), a US citizen must ask what is the Federal Reserve finally seeing that is scaring them into such historical action? Probably the same things the Roubini's of the world have been warning [Scary Stat of the Day: Roubini Calling for $1 Trillion-$3 Trillion in Losses] .... that should scare people, but instead it emboldens them to take more risk. This is the true meaning of "moral hazard".

Moral Hazard? Will this change Wall Street's ways? hahah - you made me laugh. Not in this compensation system in America where in CEO roulette - heads you win, tails you still win. Especially not in the financial system where heads you win, tails you win, and if it lands on its side the taxpayer pays the bill! [Wall Street Culture Not Likely to Change] And the Federal Reserve is helping it all along - such nice people. See, this is the irony in it all, there is no way for these people to lose. None. Never. The banking system is the US. It cannot be allowed to falter - it is now intertwined to such a degree (and levered!) nothing like the early 90s S&L bailout (when 1000+ S&Ls failed) could be allowed to happen. To do so, risks global collapse. So keep taking risk, keep rewarding yourselves with tons of bonuses and pay outs, and then when a few go under the underlings/peons will lose their jobs and 401ks, but the taxpayer will make sure the system keeps on ticking? And don't forget those retention bonuses to keep those excellent risk managers in their CEO/CFO/CIO posts. Excellent.

• And so analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning $2 per share ultimately won't have that much of an impact on how Wall Street conducts business.
• In fact, bankers and traders are under even more pressure to reap big returns because of the ongoing credit crisis, and risk is just part of the game.
• Indeed, the past decade has seen a number of investing fiascoes that Wall Street doesn't appear to have learned much from. Krosby noted the go-go Internet days -- when untested high-tech companies reaped piles of cash in public offerings. The lesson then was, don't put a lot of money into a venture that isn't on fairly solid ground -- but mortgages granted to people with poor credit are quite akin to high-tech firms that had never turned a profit. In both cases, investors gleefully looked past the risk.

The biggest risk now is if these moves truly don't put a backstop under the situation - I've been saying for a while now the implicit trust that the Federal Reserve can fix everything is really all that buffets this market from a much larger fall. I have no idea if the Federal Reserve is big enough and can print enough or it's actions are enough to support a multi trillion global shadow banking system. But they are trying and the actions truly are unprecedented in scope. For now they seem to have restored the feeling that everything will be ok. But the story is not over yet - we'll see how things continue to play out.

• The Federal Reserve has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy. The central bank acted with speed the White House and Congress only could envy.
• The Fed is largely free from many constraints that bog down other policymakers. Also, it is the only U.S. institution with the authority and ability to create money out of thin air.
• For now, the steps orchestrated by Chairman Ben Bernanke, in the first critical test of his leadership since succeeding Alan Greenspan in early 2006, are earning praise from the Bush administration, Congress and presidential contenders Barack Obama, Hillary Rodham Clinton and John McCain. (of course they are, bailout nation - we do NOT care who pays the bills, the grandchildren and their grandchildren can worry about it - all we care about is political polls in the here and now)
• But the Fed's moves are raising questions about whether its regulatory powers, established in the early 20th century, need overhauling and whether it took on some responsibilities that Congress and the administration should have shouldered.
• "I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist. "It looks like we turned the corner precisely because of what the Fed did."
• Congress created the Fed in 1913 to prevent financial panics such as runs on banks and set it up as an independent entity. Its powers grew in 1933 and 1935. Although the Fed is subject to congressional oversight, its decisions do not have to be ratified by the president or Congress. Fed officials are not paid with money appropriated by Congress.
• The system includes 12 Reserve Banks in major cities. These banks have their own boards of directors, two-thirds of whom are elected by commercial banks in the region and one-third by the Fed board in Washington.
• In a remarkable week, the Fed: (1) engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan. (2) offered emergency loans to other securities dealers under terms normally reserved for regulated banks. (3) slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September. (and you forgot about the late Thursday actions of increasing the type of junk they will now allow the financial institutions to offload into the Fed balance sheet; and don't forget last week's $200 Billion action)

An interesting "opinion" (or fact?) piece on CBSMarketwatch.com

• In a financial crisis, the Federal Reserve has an obligation to become the lender of last resort, making cash available for banks that need it right away to prevent a systemwide meltdown. But for this crisis, the Fed has become the lender of first resort to a whole new group of financial institutions that are relying on the central bank to boost their profits.
• Instead of lending only to firms that cannot find money elsewhere, the Fed apparently is lending to firms that can get the money elsewhere, yet at a higher cost than borrowing from the Fed. I say "apparently" because almost everything about the Fed's new primary dealer-lending facility is secret.
• The New York Federal Reserve Bank, which runs the program, would not comment about who is borrowing or under what conditions they are borrowing. The only information that was from the Fed came Thursday in the weekly report on reserve balances, showing that the 20 primary dealers borrowed $28.8 billion on Wednesday and about $19 billion on Monday and Tuesday.
• What executives have said, however, indicates that these firms are violating the spirit, if not the letter of the law. A spokesman for Goldman Sachs for instance, told MarketWatch's Alistair Barr that the firm has borrowed from the Fed and intends to do so again "if doing so makes sense from an economic and funding-diversification point of view." He said that the Fed was a good "alternative." In other words, the Fed is just another source of money for Goldman, and not the only one. Because the Fed's only charging 2.5% interest, it's a very "attractive" source of money
• The Federal Reserve Act, the legal authority that makes the Fed a more honorable institution than the Mafia, states clearly that the central bank may lend money to companies that are not "depository institutions" (in other words, that are not commercial banks) only if that firm proves to the Fed that it is "unable to secure adequate credit accommodations from other banking institutions" and only "in unusual and exigent circumstances." On Sunday, the Fed board voted unanimously to declare these to be "unusual and exigent circumstances."
• It's a judgment call by the New York Fed as to whether these firms can find credit elsewhere. In the middle of the worst liquidity crisis since the Great Depression, the New York Fed is understandably bending over backwards to supply credit now and ask questions later.
• Being the lender of first resort could make the Fed's goal of stabilizing financial markets harder to achieve, because the Fed could be crowding out private-sector lending. How can anyone compete with the central bank? Any firm that doesn't have access to the Fed's cheap money is at a serious disadvantage.

Another article: after reading this it looks like this man is going to be the next Fed Chief .... he is doing the dirty work behind the scenes and already he appears to be the best friend of NYC banks so who better to fill their pockets to the brim in the future?

Bank of England, Federal Reserve Deny Mortgage Security Buyout Plan

Where there is smoke there is fire. Don't believe it is NOT being talked about.

I said last summer/early fall of last year, this will be the eventual end game - direct purchases of home mortgages (the Federal Reserve currently can't do it by law) but by some arm of the government.... it sounded ludicrous then. I mean back in August everyone was assuring us this was 1x writeoffs - the correction in financials was the "kitchen sink quarter" and to "buy, buy, buy!". "Subprime is contained". But as the credit morass spreads, the depth of the web of interconnected dominoes is revealed, and the desperation by public officials, both elected and non-elected, in a presidential year increases, I thought this would be the likely "end of the cycle". In the past 14-21 days it is starting to pop up as a "solution" from the mouths of many others. As always, I'm early....

Once again, let me say when (ahem)/if this happens, the stock market will probably put on a 15-20% move instantly as we then move to socialize all losses from the risk takers to the tax payers. Wall Street will win again because the financial system can now take any risk they want, as they cannot be allowed to fail.

• LONDON/WASHINGTON (Reuters) - The Federal Reserve and Bank of England denied a report on Saturday that they were in talks over possibly using public funds to make mass purchases of mortgage-backed securities to ease the global credit crisis.

• However, the Bank of England said it was considering a number of other, unspecified options to address the turmoil in financial markets, which has continued despite the injection by central banks of billions of dollars of liquidity and cuts in interest rates.

• The Financial Times, without citing sources, said central banks on both sides of the Atlantic were in talks about the feasibility of buying up mortgage-backed securities -- key financial instruments which have plunged in value in recent months, wreaking havoc on banks' balance sheets and shares. "Central banks, including the Bank of England, have been looking at ways to ease the strain," a BoE spokesman said. "The BoE is not, however, among those reported today to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk."

• The Financial Times had said the talks between central banks were at an early stage and part of a broader exchange on how to restore stability to financial markets. It said the BoE appeared to be most enthusiastic to explore the idea; that the Federal Reserve was open to the idea in principle, "but only as a last resort," and that the European Central Bank was less keen. (did you ever imagine the day when the US was more socialistic than greater Europe? Desperate times call for desperate measures - but this free market capitalism baloney is being exposed for what it is - on the upside it is great, but once regulation, massive risk taking, and huge transfers of wealth play out - the common folk will be asked to pay the bill)

Former Treasury Secretary Robert Rubin says it's time to use public tax dollars to bail out the banks from their lightly regulated, risk loving actions. Of course it would help Citigroup which he is closely associated with; and anyone running Citigroup obviously is unbiased (not to mention did a great job managing risk in the past 5 years)

• Former Treasury Secretary Robert Rubin called Friday for quick government action to tackle the rising level of U.S. home foreclosures and he indicated that taxpayer money would have to be used.
• "There is a strong need for urgent action," Rubin, who is chairman of Citigroup's executive committee, said. "I would be very, very seriously considering the possibility of using public funds in one form or another." The Federal Housing Administration should be involved in any stepped-up government effort to help homeowners facing the loss of their houses, Rubin said during an interview on Bloomberg Television's "Political Capital with Al Hunt."
• He praised the Federal Reserve for the steps it has taken to help the economy and to ease strains in the financial markets. "The Fed has done a very good job," he said. "The Treasury, working with the Fed, did the right thing conceptually in rescuing Bear Stearns."
• Rubin said that securities companies should be subject to the same regulation as banks now that it has become clear that they would get the same government support. (yes that would be nice - I mean now they get funds from the tax payer, yet none of the same regulation as the direct lending institutions - talk about a perfect world for the investment banks)

Alert: Commodities are Dead

.... or so you'd believe if you listened to the financial news media this weekend. Wow, I have never seen such an about face based on 2-3 days of trading action. No wait. I have seen such about faces - every other month. It is simply amazing to watch these people abandon this trade in such force; many of whom were touting it up to.... last week.

I still cannot get over the defense of the dollar due to the Fed (a) "only" cutting 75 basis points instead of 100 basis points and (b) putting more language about inflation into it's statement. So the fact the Fed took a massive slash to interest rates (75) instead of a historic cut (100) indicates they are now defenders of the dollar and not inflating the currency into a hand basket? Got it. And now that they put words into their statement saying they are watching inflation (similar words to what they had all last spring, and summer) now means they are at the ready to fight inflation? By what means? Raising interest rates? Hold on why I laugh over that. So the theory is the Fed is now suddenly going to fight inflation or will in 3-6 months, correct? So they will be raising rates to offset global inflation in the teeth of a US recession. Ok, I get it now. But this is the "thinking".

Now the dollar has other reasons to rise - namely one I have been posing which is Western Europe is posed for a slowdown (along with Japan), so the dollar could rally not on the "upcoming strength and inflation fighting by the Fed" but on a RELATIVE basis to other countries which will be entering recessions (or at least slowdowns). That theory at least I can understand. I call it the 'race to the bottom' theory - i.e. who is in the worst economic shape and hence should have an even weaker currency than the other. But a 2-3 day countertrend move, or even 2-3 week countertrend move does not make a sea change - despite the claims to the contrary. And once again, if European banks need to cut rates and inject liquidity it simply creates more paper money circling the world, which is still positive for commodities... but since we only think in "dollar" terms, that's the focus. Nothing goes straight down - but I expect to the dollar to continue to be weak over decade(s) (?) until we begin addressing the structural deficits in this country. But that doesn't mean it cannot rally for 3 months at a time. And keep in mind, we will have another fiscal emergency in about 2012-2013 time frame? Why? Because we are recreating conditions for it by following the exact same policy that got us here in 2001-2002. So we'll once again be bailing out something and flooding the system with liquidity in half a decade. Those who do not learn from history....

Now a much darker view for the downturn in commodities? Worldwide serious recession, combined with deflation. That is still an outlier view and not something I am ready to get behind - but if we reach that stage your stock investments or the price of gold will be the last thing you'll have to worry about. But that's another "theory" I am starting to see inklings of...

I don't know where commodities will be in a week or two, but I've been touting my "World of Shortages" theme and have my theories on where they will be in 3 year, 5 years, 10 years - this could be thought along the lines of Malthusian economics

Malthusian catastrophe, sometimes known as a Malthusian check, Malthusian crisis, Malthusian dilemma, Malthusian disaster, Malthusian trap, Malthusian controls or Malthusian limit is a return to subsistence-level conditions as a result of agricultural (or, in later formulations, economic) production being eventually outstripped by growth in population.

This is a long, long, long term view. And it relies on world population trends, along with the thirst for many of the world's poor (which is still the vast majority of this globe) to enter the bottom of middle class.

In February 2008, the world's population is believed to have reached over 6.60 billion.^[1][2] In line with population projections, this figure continues to grow at rates that were unprecedented before the 20th century, although the rate of increase has almost halved since its peak, which was reached in 1963, of 2.2 percent per year. The world's population, on its current growth trajectory, is expected to reach nearly 9 billion by the year 2050.

So we have to feed another 2.5 billion or so within 40 years. (2.5 Billion would be equivalent to a new China, and a new India born in the next 40 years). And even if you think those numbers are baloney (myself, I think limitations on water supply will be restricting growth perhaps by famine or wars), if even 300 million people a decade move from "3rd world" to "2nd world/1st world" you have to feed (and provide energy) for a "poor man's United States" population every decade. (why do I say poor man? Well no one can consume like the good ole American - but even if they consume like the good ole Swede or South Korean, it's going to be a unheralded strain - if these people want to consume like Americans we can just forget any chance of planetary survival - thankfully there are only 300M of us). That's without any new population entering the world. Granted, Wall Street's view of long term is "next week", but without significant technological breakthroughs we have some major issues. We are well on the way to cleaning out our seas of foodstuffs. So more and more reliant on land foodstuffs. Or perhaps some sort of medical plague will wipe out a few hundred million (or more) as Mother Nature accomplished 700 years ago as a way to cull the human herd.

Now, did the hedge funds go overboard? You bet. Are we done going down? No idea, most likely not because everything overshoots. But a solid 15-20%+ correction in a long term uptrend is reasonable. Granted we already have 10%+ in 3 days - hence how horrific the fall has felt. People have been piling in these trades as "weak dollar" plays; I've been pursuing them as "World of Shortages" plays, with the weak dollar as an added bonus. Further, taking into consideration potential worldwide slowdown (even the best Asian economies slowing by 4-6% GDP points) I have been avoiding for the most part oil, and base metals such as copper. Those should be the most economically sensitive. I do have iron ore for a specific reason - fixed negotiated prices (+65%) that last a year (I love future visibility). But right now in this homogeneous hedge fund view where oil = corn = dairy = gold = copper = wheat = copper = palladium, any nuance is lost. I've been focusing on agriculture as my #1 long term bull market. People will eat no matter the economic outcome on the globe; and the fortunes of many in the developing world will still be on an upward slope as those in developed world suffer (remember where all the cash in the world is going to = petrodollars and countries with huge trade inflows). But right now a bushel of corn might as well be a barrel of oil to the unregulated pools of money running the world's investing. And when they move like a horde of locusts you get burnt in the short run.

Thinking back to last week, I have had very little oil exposure because frankly the stocks were not confirming the great strength in crude oil pricing. I had about a 2.5% precious metal stake. I did have a large agricultural stake but always will for the foreseeable future because that to me is the true commodity trade. I have begun some mining exposure in the past few weeks on weakness, mostly with iron ore exposure. I have had for a long time had coal exposure because I don't think the energy crisis is going to change anytime soon and relative to crude, coal is a steal. Speaking of... I've mostly avoided steel despite it's great strength. So that's how I entered the weak, and I simply added (mostly) to the agriculture exposure because even though I have a large exposure it is far below what it's been in the past as I've been waiting for a pullback. I've also doubled the precious metal exposure to about 5%. And with the pullback in some of the iron ore names, I've added there as well. Coal I've already had a large stake.

So again, would a 20% pullback signal the end of days for commodities. If you listen to the financial media this weekend, yes, and everything is heading back to 2002 levels. But then again these were the same folks who missed the whole housing bubble, missed the credit implosion, denied recession as even a possibility until December 2007/January 2008, and missed the first 80% of the move up in commodities (most jumped on the bandwagon right around February 08). So I have about as much confidence in the pundits accuracy as I do in Standard & Poors (who is out Friday warning about investment banks - GEE THANKS)

Can I be wrong? Always. But running independent to Wall Street herd usually works out very good in the long run, even if it provides pain at times in the near term, when the herd turns against you. Maybe another week or two of weakness for commodities in my book but nothing the US is doing is showing me they care one iota about the dollar or inflation. And with a slowdown in other world economies, and potential for 75% of world GDP (W. Europe, US, Japan) I see a lot of money creation by central banks still to come as we no longer allow the business cycle to work in this world...

Bookkeeping: 'Rising Tide' Performance Week 33

Week 33 performance of the mutual fund

Comments: I did not like Week 33, Sam-I-Am. I did not like it in a box, I did not like it with a fox. I did not like it in a house, I did not like it with a mouse. I did not like Green Eggs and Ham, I did not like Week 33, Sam-I-Am.

What more can I say? Thank god it was not a 5 day week, the way it went? 33 used to be my favorite numbers since that was my ACT score. No longer! I refute you, week 33. Sam-I-Am. I'll give the market credit, it pulled the same stunt on me in weeks 23 (fund lost 4.4%, trailed market by 3.5%) and 24 (fund lost 10%, trailed market by 5%) at the end of January when everything I was not in ramped, and everything I was in tanked, providing a double whammy. You can see it in my performance chart where the fund NAV (orange line) took a nose dive in mid-late January 08. So I gave up 8.5% of outperformance in those 2 weeks alone; now the market is so 'efficient' it was able to take all that away from me in 4 days. How's that for brevity - she did not take long in putting me in my place. While this was not the worst week of fund performance on an absolute basis, it was far and away the worst relative to the markets.

An easy explanation for this week's results - everything I own was pounded; I was on the wrong side of almost every trade. Simple enough. Sadly, I warned of this in last week's summary - each time I really begin to pull away from my index measures (which I try to beat by 15% a year), I promptly get nailed shortly thereafter. Like clockwork - November, January, now March. I wrote

I am now once again far exceeding my targets of beating the indexes by a yearly rate of 15%; usually when I reach this point of outperformance (in the past) the market has come in and smashed the fund the following week so I'll be vigilant about that.

Definitely frustrating on one level, but short of a wholesale change in the portfolio from what has been working 90% of the time to "the worst of breed sectors" financials, homebuilders, and retailers at exactly the correct moment - it is simply unavoidable. Shockingly, I entered the week with nice short exposure, nice cash cushion and a much decreased commodity exposure than I had say 3-4 weeks ago. Yet still these type of results. But this week was the historic type of commodity correction in terms of how quickly and how fierce it was. I keep using the word historic and unprecedented - these are simply volatile times and so much capital flows from 1 area to the next; when these hedge fund computers change direction it's 60 mph on a dime.

With that said, a lot of air was taken out of these holdings this week which is a good thing; and a lot of people who just joined the party in the past month and bought high have been burned and probably won't be returning anytime soon... also good in my book. Obviously we don't know how much further this correction will continue but with the severity and intensity we've seen; hopefully a good portion. I am not taking too much stock in the selloff here - simply put the hedge fund community has created massive