Tuesday, December 2, 2008

Subprime mortgages are what brought down...

Hitler. A little known fact.


Scott said...

That's funny, interesting, and in wonderfully bad taste, even for me. Apparently that scene, with new subtitles, has become an Internet meme. I had no idea.

Rick said...

Oh yes, finance nerds have been using several clips from that movie for a year now with great joy!

Konrad said...

NBER announced we're in a recession, since Dec. 2007. Wonderful timely information!!
(mistake in the header: last expansion lasted 120 months not that the recession will last 120 months.)

Amazingly enough, it looks like Ford, GM, and probably/perhaps Chrysler will survive as an on-going business. (Ford looks like they are in the best shape, if you can believe CEOs these days.)

There have been several wild swings in the market lately. Too many analysts saying it is a bottom, too many saying it is still going to go down, etc.
It is nice to know that it looks like the upward pressure is weak:

http://www.cnbc.com/id/28017123 Dec 2 11am

I am however getting a little concerned about the extent of how much downside there is left to go. Seems reasonable that we'll test the lows again but is there really another 1000 point or more down side potential from the current lows?

Came across a couple interesting articles/news things:
http://www.cnbc.com/id/28020180 Dec 2 4pm


Konrad said...

I guess I should post a caveat to the previous post. If the emerging markets (especially the exports to the US) are dependent on the US economy/consumer, then those markets probably still have some downward trend (EEV) to go. I assume that the US economy and the market will turn around (6 months?) ahead of those markets.

At the end of the day charting is probably like statistics. You can make a good case for whatever your thesis happens to be. I guess that CNBC also trolls the investment community for a good story with little to no accountability. If the call is good, it is hailed as an expert but if it is wrong, it gets swept under the rug.

On a separate note, any reason not to trade the DXD? Do you prefer the SDS because it is a larger basket of stocks?

A little while ago you mentioned the 3x leveraged ETFs. Any particular reason you selected the TZA over the BGZ (bear small cap Russel 2000 vs. bear large cap Russel 1000)?

Taking a contrarian view, are we at a market bottom when they announce a 5x leveraged ETF? LOL.

Covered a lot of different topics. Thanks.

Rick said...

A fantastic series of comments, Konrad. Thank you!

Your point about the NBER announcement reminds me of a comment I heard from one of Whitney Tilson's friends: "Just saw S&P downgraded Confederate war bonds after the close today because they concluded after completing their analysis that the Union indeed won." Heh.

Regarding your concern for the market downside, I see nothing at all limiting the downside, other than if people choose to keep paying lofty valuations, in which case the market would stay flat for years while the economy tries to catch up. But with deleveraging happening on a large scale (and all the foreign currency trade unwinds going on with the stronger dollar) I really don't think this will happen.

You asked if the Dow can really fall 1,000 from here. I'm expecting at least 2,000 (or more accurately, expecting the S&P to fall 200 rather than the Dow to fall 2000).

I believe you are exactly right on your analysis of EEV. There is tremendous downside potential, and emerging markets will not recover until the U.S. and Europe turn around. I believe the U.S. will recover first, then Europe which will also take a nasty fall, then the emerging markets.

To be honest, I couldn't really glean much information from those CNBC articles. They are interesting reads as I love reading views contrary to my own for educational purposes, but I have basically three problems with them. For one, CNBC is what I would call a "perma-bull." There is never a bad time to buy stocks. Second, charting and technical analysis may be correct, but I personally have never seen any charting that has worked. That's not to say there aren't people out there who can safely generate wealth using charts, but I have personally never run into any. I have however known lots of people who lose money using charts (mostly through transaction fees over time as their pool of money returns essentially 0%). If a chart could tell us the day and size of a rally, wouldn't we all be using it? We don't because it is completely random as to whether a chart prediction is right or wrong. This also means you can't have conviction in your trade and put a significant amount of wealth in it, because you don't know whether it will really happen. By contrast, I could put half my wealth into shorting MBI knowing 100% that it would indeed blow up. This is why I like fundamentals over any other type of investing. And third, the fundamentals of the economy directly contradict higher valuations. For all I know there could be some huge rally, but over the next year, the outcome is quite clear; a drastically lower market.

With respect to DXD, I like to short the S&P 500 through SDS better because it is more diverse. The Dow Jones only has 30 companies in it, and one of them is Wal-Mart which I don't think is at much risk in a recession. The same is true for McDonalds, and GM will of course get a bailout. That's 10% of the index, right there. Because of this, I'd feel a lot more comfortable shorting the S&P 500.

Regarding TZA over BGZ...meh. They're both so large that they will probably perform similarly. But if I have to pick one, I figure small caps are more likely to go bankrupt, less likely to raise money in the private sector, and a whole lot less likely to get government bailouts.

And yes, you are correct -- when the markets introduce a 5x leveraged fund it is time to dump everything and buy food and ammo!

konrad said...

Sorry, yes, I messed up the indexes, for the Dow, 2k from the lows and for the S&P, 200 from the lows.

Anonymous said...

Someone did a great job with that! Love it.