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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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.

People called me crazy when I first said that we will probably be going through the worst recession since The Great Depression. Now, it seems that the educated on Wall Street are finally agreeing with me. There is no doubt that this is going to be a “hard” landing.

Here are some views from Bloomberg:

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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.

Although Ron Paul is running for President very few people actually know of him. His policies are about as free market as free market can get. Support from Wall Street is raining in from those who understand the perilous position that we are in. These are two videos that every informed American should watch. However, for those that understand economics: his stance is too little too late (I’ll explain that later).

Ron Paul on the Inflationary “Depression” that is coming:
Ron Paul video on his stance for a strong dollar:

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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Here is the end of Apple’s keynote by Randy Newman.

I have been following Apple stock for about two years now. For example, have you heard of the iPhone nano? It was speculated by JP Morgan analysts last summer shortly after the iPhone was released. I’m one of the few fools out there that hasn’t made a dime on Apple because of the way I invest. I like putting my money in before big announcements that I know are going to be positive in expectation of a sharp rise in the stock price the next day. However, that has not happened with Apple for the last two years. After every major announcement, not release, the stock has never closed higher on the next day due to sell-offs. Go look up the closing price before every Apple announcement and compare it to the next days closing price. For example, the day before the iPhone was announced the stock closed at $99 and the day after closed at $90. For those that didn’t know that going into Apple’s last keynote, sorry.

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.

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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When I first saw this I was amazed. Some flippers are down 40% on $1,000,000 investments. I’ll definitely be checking this site to check up on the situation.
http://flippersintrouble.blogspot.com/