Wednesday, July 27, 2011

USA Default? Not Yet Folks..........

Let me start by apologizing for only writing on a monthly basis recently.  My schedule simply hasn't allowed any time for writing.  I love doing this blog but it's something I can only do during my spare time so please bear with me.

I am hoping to get back on here more regularly in the near future but for now I can't make any promises.

So let's talk about this cesspool we like call a stock market.  Things sure are getting crazy aren't they?  Watching the markets the past few months has been a bit like watching paint dry.  We continue to bounce around the 12,000-12,700 are on the DOW.

This has definitely been a traders market.  There is no volume which means the algos can pretty much have their way.  Stocks have basically been moving on the news of the day.  I feel like the traders on Wall St have become Twitter/Facebook addicts as they look for any nugget of info that they can use to create price action.

Unfortunately, for the average Joe this only makes investing more confusing and thus frightening.  As a result, many investors now find themselves staying on the sidelines which is why there is no volume in the markets. 

In a nutshell:  The sharks on Wall St have basically eaten the E-traders alive and they are now starting to feast on each other.  As a result, some of the best investors in the world are now hanging up the gloves.  George Soros decided to walk away this week.  His fund was down around 6% for the year and was only up 2% last year.

They realize that the glory days of 1980-2007 are far behind us now. The smartest guys in the room are have basically come to the  realization that there really is no sound fundamental strategy for making money on Wall St these days.

IMO, computer trading is pretty much destroying Wall St from a fundamental investment standpoint.  The algos only worry about what is going to happen for 11 seconds. Back in the 1970's the average stock position was held for years not seconds.  Back then you could at least make sense as to why stocks traded in a certain way.  The market historically has always been painful for all involved at some point but these days it's been taken to a whole new level which is why the smart guys no longer wanna play.

The bottom line here folks in when the best in the world can't make money it should be an eye opener for the rest of us. 

I guess the good news is I don't think it's going to last.  Once they start eating each other they will start losing more $$$ which means many of them will be turned off.  They will always be a factor but I believe in the future they will be less of one.

The Bottom Line

So what am I doing with my money these days?  Let me share and please remember this is not investment advice.  Let me also note that my stock/short positions are very small and represent about 10% of my portfolio.

I have gotten into some energy names in the nuclear/oil and gas space via EXC and D.  I am still short the Euro via EUO which has been painful recently as the dollar craters thanks to the morons in DC.

I reamin short the financials and home builders via COF and PHM which has worked out really well.

My main position however remains cash.  I am starting to not like the gold trade.  The recent move seems too parabolic to me.  I hold some but not a lot, and I am completely out of silver.

Moving forward I think we are due for a big dollar rally here shortly.  This may sound crazy given the default risk out there and I could very well be wrong.

However, my view still remains that Europe is in much worse shape than the US.  I think they will fall first which will create a huge race into bonds and other investments in the USA.  The recent price action in US bonds says it all:


Here we are days from a default and as you can see above 10 year yields have barely budged.  Why?  Because there is nowhere else to go unless you want to stuff your mattress with cash.  There is no bond market large enough to replace the USA which means there will always be buyers.

Don't get me wrong, the low yield situation won't last because we are Greece.  Buyers in the future will still be there but the yields will be significantly higher because the risk of us defaulting will rise.  However for now, risk is relative and Europe is a complete disaster versus the US.

The bond market has spelled it out for you folks.  The PIIGS bonds yields are soaring once again after a recent pullback following the 2nd Greek bailout.  Italy, Portugal, Greece, and the rest of the Euro trash increasingly look like they are all toast. 

Let me repeat:  The credit markets are telling you who is going down first and they are the smartest traders in the world.  The vigilantes are having a field day over in the Eurozone.

The way I see it at the end of the day Congress will come up with some ridiculous deficit reduction bill will get through that will allow us to continue this madness.  It may happen after August 2nd but I believe it's going to get done.  Don't be fooled into thinking it won't.

The only way I don't see it happening is because the idiots running the asylum in DC are starting to realize the only way to get something substantial done is to create a crisis like a debt downgrade.  This would then give them the political cover to make the painful cuts that are needed to get the ratings agencies off our backs.

I don't see us going down that road.  I fully expect a giant can kicking piece of crap bill that solves nothing.  I then expect to see the ratings agencies downgrade the US in a matter of months.  I suspect it won't be immediate because they are meeting with the S&P clowns on a daily basis.

The bottom line here folks is stay in cash and play small ball.  I am extremely hedged here because this thing could swing in a variety of ways. 

For the most part I would advise staying out of this mess.  There are sharks everywhere and the government is desperate to keep the game going.  I expect a large stock rally on any substantial debt agreement.  I expect a lesser rally if we pass some BS deficit reduction bill that does nothing(which is what I expect).

If nothing gets done the market is going to flat out free fall.  I still believe we will be lower by the end of the year because we don't fix problems anymore in this world.  We only delay them which only makes them worse.

I fully expect this house of cards to eventually come tumbling down.  However, I remain convinced that we don't see this until the PIIGS of Europe have been butchered and cooked into pieces of ham and bacon.

Good luck out there.

Disclosure:  No new positions at the time of publishment.