Subprime Insight

I missed out on predicting most of the month of March due to my spring break being right in the middle of the month. However, I can finally come to my weekly article with rest and confidence as many of my predictions have, to my surprise, eerily come true all too soon. I’d like to remind everyone why it is so important to make general predictions. As I said about a month ago: if you know where you are going, you know what to expect on the way there. Right now, the Market is using an old map to get to a place they’ve never been before (15,000 on the Dow).

• CORRECT: An inter meeting fed cut is likely to occur or a dramatic fed cut during the meeting (75 basis point).
  • This could be put on hold as inflation concerns, due to the weak dollar, underscore Fed moves. But now we know the Fed could give a rat’s ass about inflation.
  • I think it’s interesting how the market FINALLY agrees with me. It took them long enough. I’ve been saying this for the past month.

Comment on the Prediction:

When everyone said 50 basis point cut, I said 75. When everyone said 100 basis point cut, I said 75. Remember, I said 75 basis point cut back in the beginning of February, so that is foresight. I also put the bond ETF TLT in my original crash portfolio due to this prediction and it has outperformed all other bond ETFs out there. That is amazing. Why didn’t I go with a 100 basis point cut? Strategy. If the Fed cut 100 basis points, it would lose 25 basis points of future “ammunition,” as it is being called nowadays. Furthermore, giving the market less than what they expected is a bullish sign. It is the Fed telling the market, “things aren’t as bad as you think, really.” However, anyone that knows anything knows that completely false.

• CORRECT: The next time we drop to 12,000 we won’t stop there.
  • It just might be this week! If we don’t get there within two-three weeks, I don’t think we’ll test new lows.
  • All the cool kids on the block are talking about, “testing new lows.” The Market is simply comprised a bunch of followers.

Comment on Prediction:

I hit this right on the nose again. I’m even amazed how accurate the time frame I gave was. I said on March 3^rd that we could be seeing new lows within the week and said that if we didn’t cross that 12000 barrier within the next weeks, we wouldn’t test the lows. Now, two weeks later, it just so happened that we retested the lows within the week. Then, I advised wrote about why I was buying Apple call options by the end of the week because we would be seeing a rising market in the near future.

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Amazing strength by the Dow this morning. I would not advise jumping just yet, but in a few short days we are going to have one of the best buying opportunities of our lifetimes. I’ve been bearish for month’s but during bear markets we always see 20 percentage point bull runs.

Why will I be stocking up on AAPL options?

As I’ve mentioned before, I have followed Apple for a long time. Yesterday, I saw a pattern I was familiar with: Selling into strength or cashing out. It says nothing about the announcement! It’s just a great buying opportunity! We are truly living in historic times. Apple has just unveiled that the iPhone is the biggest game changer since the advent of the personal computer.

I’ve written about the Nintendo Apple comparison for some time now. Just last month I claimed that Apple was copying Nintendo, not the other way around. Let’s see if I can put this in perspective. Apple has done what Microsoft couldn’t with the iPhone internet browser. Apple beat Google to the completely open platform. Apple beat Nintendo by turning gaming truly mainstream. Absolutely amazing. Now, if Apple buys Yahoo! the technological arsenal will be complete for a technological onslaught in the second half of 2008.

I’ve said it before: Apple won’t be going below $113. Why? I don’t know, it’s just a hunch. Like the 75 basis point cut call three weeks ago or that we would be retesting the lows by early march. The last time it was valued at $113 was last August when the credit markets first came under turmoil, right before the first emergency fed funds rate cut.

The day of Reckoning is finally upon us. Repent or thy will will suffer the wrath of the Market.

I hope everyone and their mother either crash proofed their investments or bought massive amounts of put options. I did both to balance out my portfolios risk-reward level to something I was comfortable with.

During the past week, we’ve seen profit taking from commodities to help out the beleaguered market. Basically, when the market got too close to 12,000 commodities were sold and the market was pumped up by 200 to keep the market afloat until Friday. Why? To make it seem like the unemployment number caused the huge drop. I’ve seen this behavior before and have written about it.

Let’s be clear: this profit taking has nothing to do with the commodities market fundamentals. I’m expecting some obscure commodities to go up substantially more than gold. Some commodities are still priced as sweet prices, if you get the drift.

Why is the Market Going Down Tomorrow?

I call it the “Dow 12,000″ theory. If you look at the last time the Dow hit 12,000 in January, there was a sharp bounce back immediately for no particular reason. Investors just “guessed”hat 11,999 was ridiculously cheap for some retarded reason and bid up the market 4.9% in the following week. Now we are at 12,000 once again and speculators have had a month of losses drill the fact that 12,000 is not cheap in their heads. I call it boot camp for the hard of mind.

This whole situation reminds me of the Titanic. Those that thought this economy unsinkable laughed at those who warned of the Armageddon unfolding before everyone’s eyes. Unfortunately, for some to win some must lose. For years, the cult of the bull raged on while sacrificing the bears to the gods of indignity. Now, reason will finally triumph.

I’ve said it before, I’ll say it again: I started this blog to, one, inform the public of the terrible economic crisis that is coming and, two, to make money. If anyone has been following my portfolio, they will see that I have changed the positions a substantial amount. This is because as the days pass by, I learn more about the market. I’ll be posting the to-date returns and yearly adjusted rates regularly. The yearly adjusted rates, which will be very high, will be presented just to make fun of the market. The yearly adjusted rates are completely fictional. Disclaimer: I do not work on Wall Street, I am not a CFA and I plan to invest in some of these investments. This is just my subprime insight.

Here is the performance of the portfolio on Friday, February 29th 2008 after two days of entering into the positions:

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If you looked at my original crash portfolio weighting, I had TSCM at 5%. I took the stock off the portfolio this week but I didn’t explain why. After all, why would I buy a tech share when I’m so convinced the market is going down?

I’m a tech guy. I made all the money I ever have in tech. Until the beginning of this year, I was up 150% in 1 and a half years. I’ll eventually put up my returns for all to see. I didn’t give a crap about “subprime” or financial losses. I thought it was well contained, but, boy, was I proven wrong.

I started writing this blog after I noticed trading patterns fundamentally changing in the tech sector. How did I know? Intuition. The price fluctuation I was seeing in tech shares were way too big and counter previous stock market behavior. I’ve become weary of this phenomenon called “cashing out” and it’s effect after January 2nd, the start of the new tax year. Basically, investors wait until Jan 2nd to place trades after siting on them for a month or so to stall tax payments for a whole year. It’s really smart but common sense stuff.

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I missed the opening of the market this week, but I’ll still go through predictions this week. I want to move away from the, “it will happen this week” predictions and move to concrete important predictions. Think about it like this: if you know where you are going, you know what to expect on the way there. Right now, the Market is using an old map to get to a place they’ve never been before (15,000 on the Dow). Let’s Look at last weeks predictions:

• RIGHT: Stocks will trade lower this week as February put options expired last Friday (We are in a C Wave, also).
  • Reason: The Bearish Pennant! Here’s a good article on it. I noticed it last week and was going to write a post about it, but this stuff is common trading knowledge so everyone writes about it.
  • Economic Data being released! Since I caught onto the whole subprime scandal, I made an intuitive deduction that the end of February would see the next collapse in the market. Why? This is the point when the market gets hard data that shows just how bad the economy is. Next week we’ll see no second guessing due to conflicting numbers: they’ll all just bleed red. Look for the Case-Shiller index to crash the party for the bulls.

Comment on the Prediction:
I am completely amazed at the stupidity of the market: it has no idea what is going on. For this reason, I’m going to stop predicting when it will go down, but price targets for what is going to go up when the market goes down. Last week’s rally due to foreign exchange risk will not be happening again. It is very clear that central banks are going to let their currencies appreciate against the dollar. This is not good for foreign investors. Costs for them will increase if they are going to invest in the US stock market.

• WRONG: Bond insurers will be split.
  • Well, that’s what the market rallied on Friday. I’ll go with “consensus” here.
  • Market will probably have a nice bear rally on the news. Remember: the splitting of bond insurers does not solve any problem besides saving the muni market.

Comment on Prediction:

Oh the bond insurers! First off, I have been predicting an announcement of splitting. NOT the actual splitting of the bond insurers. That takes years. I hope you guys would give me enough credit, but if not I wanted to clarify that. Alas, that announcement did not come. Second, I found an interesting page on why they were justified such a high rating. Moody’s uses the Great Depression for stress tests. I think with this in mind and the fact Pfizer got it ratings cut, Moody’s is implying a bailout. THIS IS COMPLETE SPECULATION BY ME. This is a hunch, unlike my other predictions.

Now for Future Predictions:

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I proposed a portfolio last week made to profit not necessary from the collapse of the market but the long opportunities that will arise from the rubble of the mayhem. I’ll be tracking the portfolio using www.theupdown.com on the Subprime Insight group. I heard about the site from a friend of mine working for them and currently attending Harvard. The site is an interesting private equity project that gives individual virtual investors real money for out performing the market. I began the portfolio by placing market orders at the start of trading on Thursday. After the massacre on Friday, the portfolio has held its own with a 0.40% gain, or 73% annualized. That was the stress test, next week will be the profit opportunity. Disclaimer: I do not work in the financial services industry, I am not a CFA and I plan to invest in some of these investments. This is just my subprime insight.

The weighting last week:

Main Plays (75%):

• GLD (20%)
• DBA (20%)
• FXY (15%)
• RJI (10%)
• TLT (10%)

Supporting (25%):

• SLV (10%)
• FXE (5%)
• SHY (5%)
• TSCM (5%)

However, since then I have found some interesting new plays. So I’ll be placing new trades come Monday. I’ve also decided to step up the risk. I love risk. Here is the new portfolio:

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There are many different strategies to investing. Some follow the stars, other follow silly charts and some follow common sense. I’m with the latter. I follow a “bottom-down” approach. I look for companies or sectors of interest and try to bet on their success. After careful analysis, I place bets on companies undergoing massive change and positive cash inflows. With that in mind, the financial and residential industry became on obvious shorting opportunity. However, shorting is a risky strategy since the market can honestly be retarded at times and bid up useless companies. Thus, my main strategy is finding long opportunities as a result of short opportunities that the market has not yet quite grasped.

I usually like betting on specific companies to maximize returns. However, this financial crisis has made industry wide betting opportunities quite appealing. With volatility at historical highs since it has began being measured the best way to take advantage of this is not necessarily market timing. Just in the past few weeks, there have been many examples of market manipulation. This is where ETFs come into play.

ETFs allow investors to use complex strategies to take advantage of industry wide trends. I’d love to invest directly in gold, but that would require futures trading with significant downside risk exposure. I’d love to invest directly in credit default swaps, but that opportunity is really only available to institutional investors.

With ETFs now moving from the simple “specialized index” strategies the opportunities for profit potential are significantly increasing. The ProShares series of ETFs are the future of strategic investing. I was hoping to get to Wall Street and invent this very type of investing instrument, but I’m a little young. For example, what I’d call the “Tiger” series of ETFs would be a leveraged strategy that would long the best in an industry and short the worst. Why the hell in the world would you buy the worst in class long as has been done with traditional ETFs and index funds? These new instruments would be hedge funds for the masses: Not the crap mutual fund structure where 80% under perform the market.

To those that say it’s impossible to outperform the market: that is a pure lie. I’ll admit that it gets much harder when lots of money is involved but for the prudent individual investor the sky is the limit.

I don’t necessarily believe wave theory is as good as technical analysis, but he has some very interesting points people need to consider.

Added on January 22th, 2008:

Added February 7th on YouTube:

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Last week I posted two predictions for the week. My predictions had an amazing 0% success rate. We’ll review the evidence I had for the predictions I made and make revised ones for the coming week.

Predicted Last Week:

• WRONG: Stocks will trade lower this week as February put options expired last Friday (We are in a C Wave, also).
  • I argued this after noticing C had major resistance at 25.oo on Friday. Surely preventing options from entering into the money most have been affecting other stocks. With a large interest gone in sustaining prices above 25.00 at C, I thought that would hold the same for other Dow stocks. Sure enough, C finally did break through the 25.00 barrier but only to be brought back up by the Dow’s miraculous 200 point gain on Friday at 3:15.
• WRONG: Bond insurers will be split.
  • I was just going after what Spitzer said at the end of last week. He said bond insurers needed to finalize on a bail out plan within the coming days. He outlined a couple of alternatives. Surprisingly, the same news a week later before the market closed was good enough for a 200 point gain. This after Reuters reported that MBIA’s re-insurer had its rating cut.

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