Sunday, August 05, 2007
She Won't Be a Honey When the Money Runs Out
Let me be clear-- This girl needs to be dumped, and with alacrity. And I promise that after you dump her, you are going to be ashamed that you didn't do it sooner. This fat girl wants only one thing: your money. And when she discovers the money has run out, she'll be gone quicker than those thugs who ripped off Danny's radio. And then you'll have to explain to your friends that Ms. Fatty dumped you.
Ahhh. So you see where I'm going with this. The money has ran out of this market, and as you have seen, its been like watching five fat girls all trying to get out through the same door. Hopefully, you were smart and beat them out. If not, you are doomed to watching their fat asses, while you decide when to make a break for it.
Long story short- many investors who bought these bonds will not be returned their principal. Investors are just now beginning to see the effects. In short, our fat girl, with loads of personality, has just realized that there will be no more easy money. How deep does the credit crunch reach? I think that it will affect everything within our economy- the consumer, the retailer, the small business, the large business, the banks, etc. However, what is more important than what I think is that you develop an honest realization of your level of experience in trading during this type of environment. If you fully understand Asset-Backed Securities, and you have a deep understanding of the ramifications a credit-crunch will have on the market, then maybe you can profit.
"Any way one looks at it, nothing is more difficult than succeeding in Wall Street, yet nothing is attempted by such a poorly equipped people or is considered as easy." - Gerald Loeb
This where you decide, sooner is preferable to later, if you are equipped to deal with what may occur over the coming weeks. Sure, the markets will bounce, but then what? What is your plan? How long will you watch the market fall before you sell everything? When will you decide to get short? At what point will you buy back in? Are you going to try and call a bottom, or wait for some sort of confirmation?
If you are feeling rather poorly equipped, consider looking back at history to guide your game-plan. You will find evidence which can paint both bullish and bearish scenarios. My experience tells me that sell-offs of the magnitude we have witnessed over the past two weeks typically take months to unwind. As I try to gauge just how far the market might fall before it rebounds, I begin to look at market fundamentals and macro-economic events. It is certainly a mess out there right now, as investors are filled with fear, uncertainty, and doubt. We all know how much markets like FUD.
"There is the greatest protection in all the world in the ability to shift capital quickly and at small cost." - Gerald Loeb
I assume that the majority of readers here are retail traders. Typically for a small fee, we can close out our entire portfolios, and for the same fee, re-establish the positions. We have a huge advantage over the hedge funds and institutions.
I encourage you to view incurring these small fees, from closing out positions, as insurance. If you want to trade in the coming years, you must not allow yourself to get washed out this year. No one can say for sure whether the credit crunch will cause a healthy 10% correction, or whether the market will enter a full-on bear phase. You are thinking, "But Mr. Woodshedder, the majority of companies have beat the analyst's estimates for Q3." Sure they have. But irrational markets work both ways. It is entirely possible the market may over-react to the downside.
So while Boone makes make a solid argument for not throwing the baby out with the bathwater, I think he is assuming that everyone out there is just like him: young, well-capitalized, smart, good-looking, with a background in finance and accounting. I am assuming that many of you are not equipped to fully understand what is going on around you (no offense). My mission here is to implore you to take stock (pun intended) of your experience, and develop a plan for dealing with the current market environment, being sure to include worst-case scenarios.
Finally, I understand that many readers here want some sort of advice from the weekend guest-bloggers. My advice to you is to raise cash, and begin a watchlist of stocks to get short on the next bounce.
Whenever shit goes down it's the end of the world or unbridled euphoria when things are going up.
Woody, you ride the emotions of the market too much and over analyze technicals.
What stock has made you the most money this year? MVIS? why? because you believed in the company story. Other than that I doubt you made a net profit on your other trading.
The market has always been about individual stocks and selloffs like this are great ways to pick solid companies at cheaper prices.
Another thing, look at the monthly charts of the INDU, SPX & COMPX and you'll see this selloff put into perspective.
I plan on retorting by posting some kind of credit-proof stock list, to the degree that it is possible to find such companies. With so many worthless patents out there, it will be difficult. But, there HAS to be something good. Maybe there's a repo stock we should be looking at or something.
I dont think the suggestion was to do all those things monday at 7am, just to think about them.
Unfortunately, you can trade in and out of SYK fifty-seven times, and be totally unprofitable. Or, you could have bought and held for SYK for 15 years, and bam, big winnings. It's only relevant in hindsight.
This give me a good idea for a post
I've got to step out for a bit, but I will be back to comment on the comments. Good stuff guys!
Something came to mind while you compared the advantage of a retail trader vs institutions... we are nimble, like market "terrorists."
Forgive the analogy, but please endulge me.
We can quickly, at low cost, move in and out of positions. We can strike, retreat, strike again... disappear...reappear... etc.
I can, effectively, move my entire net worth in and out with a click. No committees. No manager looking over my trades. No disclosures. No investors. No regulations.
Just me, a pile of money (or credit), a mac, and a click. Voila! A market terrorist.
Solid post. If most of the people reading this blog are indeed retail investors, then I'd recommend getting a copy of IBD and following their method. Sell if a stock goes 8% against you. If you buy at $100 and the stock is trading $90, you should already be out.
Act first, ask the questions later. Like Wood said, markets are irrational on the way up AND on the way down... just take a look at the graph of TNH if you don't believe this. Heck, I bought NT when it was trading $77 back in the day. I sold at $70. It's one of the best trades I ever made!
-DT
Don't always think Cramer is on your side.
Cramer is on Cramer's side.
IMO (I may be nuts) but I believe much of the volatility is the result of a change in the market from small caps (which are expensive relative to large caps) to large cap growth tech stocks from the 2000 era that have lagged. I belive money flows are comming from energy,metals,small cap to large cap growth i.e. CSCO,INTC,AMAT,etc. That being said one of the worse things that could happen is if we rally first thing Mon. I would rather see a major "V" bottom in the morning with panic and brokers throwing up.
The current market environment is what some would characterize as a "slow-motion train wreck". There is serious damage that has been done to the credit markets and that is not going to go away overnight.
But, Uncle Ben and the Fed have no justification for lowering interest rates -- I don't care how loud Cramer howls. The recession numbers are not there.
It is still unknown what the carnage will be a year from now. Keep in mind that many ARMs will be resetting at higher rates as Woodshedder indicated. Loan defaults are on the increase and so it will be with the foreclosure rates.
Danny, in Cali, how long does the state law provide for the foreclosure process? Six months? One year? Eighteen months? State laws vary from months to over a year. Now picture down the road what it will be like when loan defaults and foreclosures in 50 states accumulate month after month. What happens to asset-backed paper when those assets are written down 40% - 50% from the top of real estate bubble prices? It is bad, and will be bad.
Slow-motion train wreck.
This will be a tough market to make money-- even for all the "big boys" who read COT reports. I don't buy into the strategy of riding the coat-tails of the "locals" right now. After all, it was Wall Street, the banks and the Fed who created this mess we are in.
IMHO, it is possible for a good swing trader who sticks with a disciplined system to come out on top, in what will be a volatile market lacking the general uptrend that most need for their trading plans to work.
I say let Joe Chucklehead have the Fat Chick. Right now I can't see to much out there to get Jazzed up about.
The American auto industry is in the toilet can you say upside down. The
construction,housing,financial industry is basically FFN (fucked for now)TC-I just made that one up.
$3 gas for wifey's Ford Explorer.-- Advent of mass credit card spending. Re-fi your house and take that vacation you always wanted. Terrific.
I don't think I would want to be in the business of valuing stocks this week short or long.
Look, the best time to buy is when you are totally nauseas with the market. Most of us never do because we need to be re-assured by the talking heads or the Fly's of the world that everything is A-OK.
Best advice to you Danny-- invest in yourself.
It is really hard to step back and develop a plan that will have a high liklihood of success, even if future market events do not turn out as expected or predicted.
What really is success will be different for each trader, but for me, success will be preserving capital during this time of FUD, in order to trade another day.
I do have to say though that the fact that most everyone *seems* to agree with me, save for SDB, is a little unnerving.
Errr, not sure what you're getting at here, Bruce? Are you saying they're faking the COT data now?
"They" being the Beast from Jekyll Island/Illumanati/Corleone Commission, etc, etc?
Smart money can be dumb. A lot of smart money (hedge funds,banks, investment banks,etc) are going under from this sub prime debacle.
There's no question that smart money can be dumb, as can we all. However, one thing the COT smart money cannot be is small. The whole reason analyzing the COT makes any sense whatsoever is because these are the 80 (or so) largest commercial (that's money center banks, not hedgies) trading operations in the world, and how they trade, so goes the market... in the intermediate to long term. They are not going to catch every blip but they will tell you when the bear is coming, and as of right now, it aint', according to them.
Smart of dumb doesn't matter... volume matters.
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