Thursday, October 23, 2008

Sell your stocks. Do it now.

I'm sorry I haven't been responding to e-mails. I've rarely been so worn out in my life. I'm spending so much time on this stuff that I'm running on 4-5 hours of sleep per night. I have constant headaches.

With that said, I have never been so afraid for my country in my life. Including 9/11. Chances are good that things will be bad but not catastrophic. But, there is a relatively high chance things do get catastrophic. In either case, there is absolutley no reason to be long anything. The recent pundits are nuts. We probably won't have another Great Depression, but we will have one of the worst recessions ever seen on Earth.

It isn't hard to do the math, folks. Lets go conservative and assume a 20% decline in earnings. Now lets assume the recessionary average earnings multiple of 10 for the market. That puts the S&P 500 at 600-650 without much trouble. It is 900 now. The fact that people like Tilson - and yes my lifelong hero Buffett - think that Coke or Amex is cheap right now means absolutely nothing.

I am really, really, really short the markets. I'm short the S&P, short the consumer services sector, and as of today, short the emerging markets -- and all at 2x leverage through inverse leverage ETFs. I'm also short the regional banking sector outright.

Today I put 20% of my net worth into EEV, which shorts emerging markets at 2x leverage. I also sold puts AND sold calls on the S&P 500 (specifically SDS, which is an inverse leveraged ETF of the S&P 500), which means I likely just pocketed lots of free money. I'm so short that I have options on my leveraged short positions.

If you purchased SDS and SCC back when I annouced, you're up big now. If you haven't it now. Sell something you own and short the market. We will have enormous earnings surprises -- and not the good kind.

Banks are pretty well regulated, so we setup an entire shadow banking system to invent new kinds of finance. That entire shadow banking system is now unwinding. I'm going to copy Roubini here and warn you not to be surprised if the United States of America shuts down the stock market for a week in the midst of outright panic.

I see this two ways: you're either going to make a lot of money by shorting the US and emerging markets, then buying everything after the panic with all your cash (making huge profits both ways) or you're going to sit there and lose another 50% of your life savings. I know which path I'm taking. I'm shorting the hell out of the market, going long in two years, and buying a house in cash in three. Sitting there with no investments, on my deck, watching stagdeflation run rampant, as we get a stagnant economy and deflation at the same time.

Posts like this are crazy, until they're not.


Mitch said...

I couldn't agree with you more. It seems deflation is being largely ignored as an factor which will lead to additional erosion of financial institutions.
On a side note, it's very puzzling why WEB is selling his treasuries now and moving to equities (and also announcing it). He hasn't done this for many years and it doesn't seem like it is the right time. He would only do this if he was extremely confident that now is the time to find bargains.

Anonymous said...

I had been looking for a good short in retail and your choice of SCC sounds just right. I have yet to buy into EEV, but do you think I should wait until another euphoric rally before opening a position? It is already up approx. 30% in the last week!


Rick said...

Hi Walter,

The problem here is that I have absolutely no idea what will happen in the short term. I can give a clear picture of what will happen long term - markets will fall - but to mess with when to get in, when to get out, and all of that, I just honestly have no clue. We could have a 25% rally in the Dow in between now and the fall for all I know, I just know that eventually, the indices will have to fall.

With that said, I would guess that there is something big coming this weekend. There are a lot of rumors floating around. I would wait until Monday and hope something big is announced. You may get a decent rally, especially in the emerging markets where things are more volatile. Don't worry too much about past movements though...just look to the future. EEV had a very recent 50% rally right before I bought it! There's nothing we can do about the past rise, but just know that the market isn't anywhere close to pricing in the full scale of this recession.

As far as SCC, it really hasn't moved that much compared to most of the other inverse-leveraged ETFs such as SKF or EEV. For some reason, retailers have only fallen roughly the same as the Dow. People are still pretending holiday shopping will be almost as good as last year. I would go ahead and just jump into SCC now and not worry about it.

Rick said...


Yeah, it is puzzling, and it really troubling me. I've never gone against my hero before, but I'm just so strong in my convictions on this. I'm thinking about doing a post regarding Buffett's article.