What to do…

The Market is clearly moving against me. My stop-loss orders have been triggered for SKF, SDS and Xact Bear yesterday or today. I lost some, but not too much. I still think this is a premature rally and that the fundamentals just isn’t there yet, but there’s no arguing with the Market, since only price pays. I’m mostly in cash right now, trying to figure out the direction of the markets for the rest of the week. The OMX Exchange closes midday tomorrow and is closed on Thursday, so I probably will not enter anymore positions at the OMX. The American markets are open as regular and I am tempted to ride this upwards push for the week, perhaps with Direxion Daily Financial Bull 3X (FAS) because of the huge leverage (of course this is risky). But I will for sure get out before the weekend in that case.

On a note of some trades that actually gone my way yesterday and today is PA Resources. I have, for quite some months, had a huge exposure in their convertible KV1 (which I sold of 75% of last week only to buy back at a lower price yesterday). Yesterday the company was mentioned very favorably in the Swedish stock-picking magazine Börsveckan. The stock jumped some 8% yesterday and is up 8% today also. The Convertible is not far behind, but still the favorable lag in its price is a bankable reality. For traders the stock is preferred because of the larger movements in price, but the convertible is far better for long-time investments (the last date to convert is september 2013).

So, last week was negative (positive for us who where short…) on basically all exchanges over the world, with the American markets in the lead. The US financial sector is severely overbought, and I was anticipating a correction to take place. The downturn last week was only a fraction of the needed adjustment thou, and I am expecting the financial sector to lead the way downwards this week as well. I am therefore keeping my SKF and SDS positions and will probably take up some FAZ sometime over the week also.

In the Swedish market I now almost solemnly hold XACT Bear ( a 1.5X inverse ETF based on the OMXS30), lets hope the OMX follows the general trend down…

The USD has strengthened a little against the SEK, according to my predictions, and I think it will keep this trend (as long as the markets fall investors will inadvertently buy more dollars).

Tyler Durden has written an interesting piece on the future valuation of the greenback over the weekend. It is sufficient to say that this dollar squeeze has been a reality for quite some years, and It will be in effect again when the markets stabilize after the next low (I don’t believe that the low in march was the end of the crisis, there will be no V-shaped recovery, but more likely a W-shaped).

http://seekingalpha.com/article/138085-dollar-euro-short-squeeze-race

Personally I’ve gotten more interested in the FOREX market over the weekend after a friend gave me a link to some very interesting automated trading possibilities. After spending several hours reading about the market and trade in general and trading platforms and technical aspects in specific I am very excited about these possibilities. Expect me to start writing about these investment opportunities as soon as I’ve taken some of the first steps. Just to clarify I don’t think that the FOREX market is the holy grail to investments, I see it as a way to further diversify a portfolio, and probably will allocate no more that 5% of my portfolio to this market.

Read up on the basics of the FOREX market at: http://www.babypips.com/school/

Since I’m in short positions all over the board today’s markets is a bit worrisome. The OMXS30 closed up 1.21% after trending around opening price most of the day. The move upwards came when the NYSE/NASDAQ opened and started trading with small movement (now they’re both up at about 1%). I took a large position in XACT Bear early in the morning that I decided to have over night. I’ve put quite tight stop-loss orders in place at 4% down.

The US Financial sector is recovering today, I am sorry to say. My position in SKF is taking some damages, but I will stick with it for the time being. The Short term trend is still down. SDS is doing better for now and I am definitely staying for the week. I’m putting a stop-loss at 10% on both SKF and SDS. Early in the trading today I sold of the FAZ I bought yesterday at a small loss of 1%. The 3X is just to agressive to have when the markets are going the other way (even if it’s just for the day).

Since I’m travelling from Bremen, Germany to my home in Skövde, Sweden tomorrow I am a little bit worried about my positions, but I am trying to convince myself that the stop-loss’es will save me some of it if the upwards movement continues.

As of today I am almost completely out of equities. Even sold 75% of my convertibles in PA Resources, hoping to be able to buy them back in a few weeks at a lower price (I still believe in the company). I’ve also sold EWM, EWZ and FXI since I think the emerging markets are going to crash along with the financial sector in the US and Europe.

I also switched investing vehicle for gold (I am still long) from futures to the SPDR Gold Shares ETF (GLD). Much easier management of investment and low costs.

So what have I bought? Well more inverse ETF’s actually, took (large) positions in Direxion Finacial Bear 3X (FAZ) and ProShares UltraShort S&P 500 2X(SDS). So far this looks to be the right move, but even if the market stops falling this week I very strongly feel that the bear market rally now is dead and that we are going to see a real drop all over the board. I expect the S&P 500 to drop at minimum 30%, but more likely more that 40%. The Financial sector is going to lead the way.

Last fall, when the markets crashed, the USD and EUR strengthen against the smaller currencies (I care mostly about the SEK and NOK) and I expect this this time also. Since the Fed started pressing new dollars I’ve been short in the USD, but I will now step out of this position. I will not intentionally long the USD, but most of my investments now are in ETF’s at the American exchanges so I will ride the USD upwards in those positions. The Fed will continue issuing more and more dollars to cover the programs it has started to recover the markets (TARP, PPIP and so on), but the mighty greenback will still be able to hold it’s position since basically all other currencies are in for the same deal (ECD are just starting).

So, basically I’m now a complete bear, and I’ve took the most bearish of positions possible, and I’m just shy of All-in. If I’m wrong I will lose alot of money. Let’s keep our thumbs.

The risks I see that could stop the crash is the US governments tampering with the markets. But I really don’t think they can do much. People are starting to realize that the crowd is moving towards the door, and some of them are already running. Soon the stamped is a fact.

So, do other bloggers agree with me? Some do:

http://seekingalpha.com/article/137355-stock-markets-reversal-time

http://seekingalpha.com/article/137401-how-low-can-global-economies-go

http://seekingalpha.com/article/137234-credit-card-receivables-even-moody-s-thinks-the-fed-s-adverse-case-is-a-joke (Tyler Durden is very productive and always offer great insights)

Also there’s a interesting graph at dshort.com. Nothing new perhaps, just a new presentation:

http://dshort.com/charts/total-return-bear-comparisons.html?total-bear-comps-2007-1929

So, I finally got around yesterday to do as I say (and have written about) and started shortening the US financial sector. My vehicle of choice is ProShares Ultrashort Financials (SKF), a 2X inverse ETF. I was pondering the Direxion 3X inverse (FAZ), and in retrospect it would have been better, because the banks started gliding yesterday and continued today (so I would have made approx. 50% more with FAZ). I wanted a ETF that I’m comfortable holding for the week thou, and a 3X is terrible if the markets whipsaw a bit (2X isn’t good either thou). I might switch if the trend is sustained during the week.

Results so far is 10.4% up on Monday and 8.0% Tuesday as of this writing (thou the day isn’t over yet).

Just found a blog from J.S Kim (very sound opinions in the past) that makes my move feel even better, although I did it some 30 hours before reading this. Lets hope we’re both right: http://seekingalpha.com/article/137132-u-s-bank-shares-pump-almost-over-get-ready-for-the-dump

I’ve also sold of all Swedish equities short of PA Resources convertibles and a small post in Malka Oil (quite the lottery). Still holding Avanza Zero (OMXS30) but if the trend continues another day it is gone (OMX closed down 1.79% today). I want to have cash when the serious blowback starts.

Okay, I know that I’ve made posts before about the imminent crash, but this blogpost is just so excellent in showing how the banks made the Q1 “profits”.

http://seekingalpha.com/article/136769-a-summary-of-q1-bank-earnings-world-you-just-got-hustled

Again, if I were an american taxpayer I would be enraged at the current government. Luckily I’m not. But the ramifications will of course be severe wherever you live, since the greenback is basically every nations second currency (and many even the first).

So, what am I doing now? In short, I’m starting to sell equites on all markets. I have some ETF:s left in emerging markets (FXI, EWZ and EWM), but I think even those will have to go this week, and a long position in OMXS30 that I will reduce. I’ve also today taken up short positions in the S&P500 and EuroStoxx 50. Since before I’m short the USD and EUR and long gold, silver, platinum and palladium, that will not change.

So how about gold? I think it will be considered the “safe heaven” it historically often have been when there’s storms abruin.  So I’m staying long in gold. Some bloggers agree with me: http://seekingalpha.com/article/136849-how-will-gold-perform-in-the-coming-equity-crash

Silver then? Not so sure anymore. One of the arguments for a bullish outlook on silver is gone if there is another wave of crisis and that’s the increase in industrial use. But for now I am staying long in silver too, just not as much as gold.

Platinum and palladium is even more dependant on the industrial use buyers, so I will keep them on a short leach for now. Signs of declining prices and I’m gone.

Oil then? I think we will se a stagnant oil price now around $55 for Brent. The summer usually means higher oil price, but not this one I think.  Despite this I will keep my convertibles in PA Resources (on the OMX), because I think they will announce news about the finds in GITA soon (Noreco has given some estimates in their Q1 report). But I might short the Oil just in case, we’ll see.

So, is everyone on board the bear market rally soon? That’s when it turns. I’ve been believing the same for a month, so it’s perhaps not news anymore. I was hesitant to ride the rally at first but I couldn’t resist it. Now I think it’s time to put real tight stop losses on thou. I’ve taken long positions in gold and silver the last weeks and shortening the USD and EUR this week (against the SEK) as precautions, but still the equity rally is so tempting.

I’ve found a few people who agree with me about the likelihood of a turnaround, but of course only price pays in the end…

http://seekingalpha.com/article/136495-12-notes-on-the-current-market-situation

http://seekingalpha.com/article/134482-why-this-rally-is-unsustainable

http://bnwnewswire.com/editorial-Imminent-Market-Meltdown-Spells-Misery-for-Most.html

http://seekingalpha.com/article/135284-market-direction-top-strategists-weigh-in

So the coming week(s) I think we will have a really touch and go situation with lots of people thinking exactly like myself and putting tight stop loss orders in place. The whole situation could escalate quickly on some bad news (of any kind).

This is a very good sum-up of the current crisis in american banks. Since they won’t allow them to fall (BoA and Citi in particular I think) these banks have to be forced to split into smaller units. “The Big 6″ perhaps should become “the Not so big 18″.

Link: http://seekingalpha.com/article/136196-stress-tests-and-the-nationalization-we-got

The Swedish bank Handelsbanken (SHB) recently announced a new product connected to the Chinese and Russian markets with a fixed 28% ROI (minus fees) if both the markets show positive returns after one year (as little as 0.1%). If this criteria is not meet the coupon goes on another year and so on up to 5 years. Every year gives a 28% return (IE 56% after two years, 84% after three up to 140% after 5 years). If not both markets are positive (at least one is negative) after the fifth year but none has fallen more than 40% the coupon defaults and pays 100% back. If at least one of the markets are down by 40% the coupon pays 100 - the worst markets return, IE if the Russian market falls 45% you get 55% back.

The most likely outcome is that both markets are positive after the first year (64% when backtracked march 1998 - march 2008) and the second likeliest outcome is that both are positive after two years (23% when backtracked). These two scenarios then make up 87% of the backtracked outcomes returning a very healthy 22,9 - 23,8% (including fees). In the backtracked period 2% of the tested months gave a negative return after five years, and I think that is very unlikely in today’s market also.

I think this is a excellent ‘alternative’ product as part (perhaps 5%) of a well balanced portfolio since it very likely locks in a profit of over 20% over a 1-5 year period. The last day to sign up is 17th of May 2009 and the Coupon will also be traded on the OMX Exchange from 28th of May 2009. The courtage when bought from SHB is 2% so perhaps it can be beneficiary to buy coupons on the secondary market (where you will be charged your normal courtage).

I will sign 200 coupons myself.

Link: http://hcm.handelsbanken.se/struktureradeprodukter/Warranter-och-certifikat/Erbjudanden/Kupongcertifikat-/

New blog then. Expect entries on interesting stuff I find on the Internet and discussions of matters of finance (I like portfolio management with ETFs right now…), poker (I play somewhat regularly and like to think about certain aspects of the game) and life matters (personal things I guess).

BR Johan