Friday, October 10, 2008

When to Hit the Panic Button

Momentum and technical trading has always been a tough pill for me to swallow. I believe that the daily news has resulted in unprecedented volatility to financial markets filled with unsophisticated and extremely sophisticated investors. The gamut runs from index funds to hedge funds and hot stock tips to judicious arbitrage using long positions, short positions, put options, call options, futures contracts, and derivatives of all of the above. Commodities speculation has always been ballsy, but today “Joe 6-Pack” can probably tell you the cost of a barrel of oil as well as the cost of a 6-Pack of Budweiser.

The current economic downturn is real in term of deflating house prices triggering tighter credit and lower spending. The cost of capital is going up which cuts into profits and if people are finally over the illusion of being “house rich” then their spending should go down. The self fulfilling death spiral will lead to higher unemployment which was the biggest reason the depression lasted as long as it did relative to other corrections as in the 70’s and 1987.

Fortunately baby boomers have already started leaving the workforce. Many boomers have pensions and good health thanks to reductions in smoking and active lifestyle choices. At the other end of the spectrum the folks living on social security will not be hurt by lower inflation.

The meaty part of the market right now is individuals born 1958 to 1978. These folks had no skin in the game during the 1970’s pull back even though they may have struggled to find work initially. They saw extreme bull markets even with the 1987 pull back which recovered in 1 year and the 2001 pull back which they blamed on terrorists as much as internet speculation. These folks are really scared for the first time and are willing to sell low to avoid selling lower.

We as a generation are in debt up to our eyeballs, are job hoppers with little security, face escalating college costs for our children and have never been forced to live within our means.

I am forced to steal a scene from the Godfather prior to going to war with the other families when Michael takes on the responsibility to kill Sollozzo and McCluskey. Clemenzo's response sums up my current thinking on the financial markets, the need for corrections, so that everybody gets a smack upside the head reality check and the men are separated from the boys and the women are separated from the girls. Unfortunately, I am not enjoying my smack upside the head, but being a dual income family we have a little more cushion than most.


How bad do you think it's gonna be?


Pretty goddamn bad. Probably all the other Families will line up against us. That's alright -- this thing's gotta happen every five years or so -- ten years -- helps to get rid of the bad blood. Been ten years since the last one. You know you got to stop them at the beginning, like they should have stopped Hitler at Munich, They should never've let him get away with that. They were just asking for big trouble. You know, Mike, we was all proud of you -- being a hero and all. Your father, too.

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