Subprime Insight

One of the reason’s I’ve been paying close attention to the market is because a close study of them can tell you exactly what the smart money is betting on. Two months ago I came to a horrible realization that the smart money has been betting on truly catastrophic events happening for quite sometime now. We have a couple of choices, but neither are good. We could go through stagflation, which we’ve been through before, no problem. However, it’s looking like we will be going through deflation if every step is not taken to prevent it, but, again, we’ve been through that during the Great Depression. Yet, the worst of all economic outcomes is an inflationary depression. We have not been through that and the outcomes of such economic times are horrific. Here is a visualization of that possibility from MTV.

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.

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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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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I recently wrote on the topic of oil and gold. I argued we should be seeing a bull market for both mainly due to the weak dollar. This goes against the grain to what people are touting as their main excuse: demand. I already pointed out that the evidence suggests the opposite. Here is an article on Indian housewives spending less on gold. Here is an article on oil inventories going up. Here are two views on oil and gold:

Bloomberg: $1200 gold in 3 months due to weak dollar.

TheStreet: Why gold is worth waiting for: pushed up demand.

I have a personal attachment to both companies as I know people who work for each company. However, I think the weak dollar is the reason for these investments decoupling from equities.

My primary goal in starting this blog is to gather important information on the markets to inform and to potentially profit. For the past couple of months I’ve been playing catch up with the market: trying to figure out what information has been properly priced in and which hasn’t. For example, the large financial firms have experienced most of the price action they are going to get. Disclaimer: I have never traded either gold or oil or followed their price actions for any substantial period of time.

With that said, if you agree that:

• With every Fed cut, the dollar devalues and that for the foreseeable future we will get more. I’m thinking 1% Fed Funds rate by the end of summer as treasury yields go down below 2%.

• Oil is only traded in dollars. So every foreign country with a currency that has appreciated against the dollar has seen oil prices rise slower than that in the US.

• Using correlation trading, an ounce of gold has historically bought you 17 barrels of oil. At current valuation gold would buy you 10 barrels. Check out this article on the gold oil swap.

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I’ve been meaning to write about actual investment ideas and the outcome of the current financial situation for some time. This is more of a public exercise to educate myself rather than investment research, but informative non-the-less. I’ll be posting up my predictions on a weekly basis before the market begins trading every week. Here are this week’s predictions:

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