Sunday, October 26, 2008

Investment Disclosure: Big portfolio shift

I've shifted things around a bit, and I suspect this will be it for me for the rest of the year.

I've closed out my entire MBIA short position, including the options. On a fundamental level, I still firmly expect MBIA to reach $0. The problem is, I cannot calculate the risk of a specifically targeted government bailout. Now there is absolutely no reason to save Ambac or MBIA, as the government could simply backstop the bonds those companies have insured and let the companies fail as they deserve, but I have no idea whether they will do the right thing. There are even already perfectly reasonable bond insurance companeis ready to step in and fill the void, such as Warren' Buffett's Berkshire Hathaway, so logic would dictate there will be no bailout. But the last two men in the country to see this crises coming (Bernanke and Paulson) have been given what will prove to be an endlessly blank check. I can't count on where they will spend it. The projected returns, although massive, aren't worth it.

While the the thought of my tax dollars being taken from me and given to the company I've been so vocal about for 18 months is enraging, there are lots of opportunities to make enormous money, and we have to move on.

International markets (and specifically emerging markets) are probably the biggest opportunity to profit from this crisis. Over the next week, in addition to the enormous headwinds coming from rapidly deteriorating fundamentals, there is likely to be a serious currency crises that unfolds. Drops in energy, drops in demand from developed nations, and drops from currency all at the same time will all but destroy emerging markets. The inverse fund I mentioned in earlier posts (ticker: EEV) is likely to skyrocket.

In addition, the developed international markets are also a tremendous play. The margined, inverse-leverage ETF for the developed world (excluding the U.S.) is EFU. Europe is in a world of hurt, and I think they're far worse off than the U.S. Add into this the currency problems (in relation to our dollar) and you've got another strong investment.

I am now essentially fullly invested. I'm short regional banks, short the S&P 500, short the emerging markets, short the US retailers going into Christmas season, and tomorrow I will be taking the proceeds from exiting all my MBIA positions and rolling them into EFU.

If I'm correct on my emerging markets call, I will likely take a two week vacation to one of them. I'll probably going to Thailand in the spring, or possibly still Iceland. (When your banks borrow 12 times your nations GDP and your stock market drops 83% in a a few weeks, you're an emerging market).

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