Catching Wild Pigs...

An investment advisor - who shall remain nameless - came to see me last week. His take on the Global Financial Meltdown.

• "It's basically over."
• "Every country is coming up with new stimulus plans and bailouts."
• "These bailouts will resolve all issues and turn the market."
• "This is an excellent opportunity to catch the market at its bottom."

When he talked about how the bailouts will make everything better, I found myself remembering a story about catching wild pigs ....

You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down on one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again. You continue until you have all four sides of the fence up with a gate in the last side. The pigs, who are used to the free corn, start to come through the gate to eat, you slam the gate on them and catch the whole herd.

Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught. Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

That is exactly what is happening all over the world and especially in the western economies. The governments keep pushing its citizens toward socialism and keeps spreading the free corn out in the form of new stimulus programs and bailouts. While we continually lose our freedoms -- just a little at a time.

A rumor.....

I have an account with Citibank, that I have in the past used to buy mutual funds park some cash etc. From time to time their "Relationship Manager" will come calling and try and sell me some more mutual funds.

On his latest visit he mentioned an interesting tid-bit. The banks are all buying the long-end of the T-Bill (India Gilt) and not the short-end. I thought that was interesting because its contrary to what the banks are "expected" to be doing.

One of the easiest ways for Banks to earn money is to play the spread i.e. acquire funds at the short-end and lend out funds at the long-end. Thus their goal is to have a steep yield curve - with an upward slope, anything else and they make less profits than they normally would.

By buying the long-end they are increasing the price of the bond (higher demand) and depressing the yield, this flattens the yield curve and reduces the profits banks would make by playing the spread.

So why are they doing it? Are they expecting Deflation in the future and hence lower interest rates, and in so doing locking in the current "relatively" high yields.

Britain is bankrupt

That's a monthly chart of the British Pound (GBP) against the US$. Notice the Waterfall-like fall from 200 to 140. It's currently at pretty strong support going back to the lows in 2001 and 1993. I expect this support to hold .. for now. When this support breaks, and it SHALL, its goodbye and goodnight.

The British government has taken on the liabilities of its banking system. RBS alone has liabilities of £1.8 trillion, three times the annual government spending, against assets of £1.9 trillion. While RBS is notionally solvent, the true value of its assets is considerably worse.

Meanwhile National Debt is approximately 630 Billion GBP and GDP is approximately £1.4 trillion. The total Debt load is thus conservatively 100% of its GDP. Niall Ferguson in his excellent book "Empire" showed that the UK has in the past consistently carried and serviced Crown Debts between 2-3 times its GDP. Unfortunately in those days, Great Britain was the world's paramount superpower and the Sterling was the reserve currency of the world.

In attempting to fight deflation and unleash a storm of liquidity the BoE governor Mervyn King has said "Despite those big cuts, there remains a risk that inflation will fall below 2 percent," ..... "It is sensible for the Monetary Policy Committee to prepare for the possibility -- and I stress that we are not there yet -- that it may need to move beyond the conventional instrument". Translation: Rate Cuts are doing F%$@-all to solve the crisis, we must start monetizing government paper.

I had thought Russia would be first major economy to default, it looks like I was wrong. That honour might be bestowed upon M/S King and Brown. Welcome to Reykjavik on the Thames.

I changed my mind

After having studied the S&P chart in more detail and looked at the damage to the XLF, I have decided to dump my long Big Caps, long Nasdaq 100, long Oil & Gas and long Semi positions at the open. I am opening a new short position on Small Caps. I will be keeping my long Agriculture and long Crude.

I fully expect to buy them back cheaper, possibly later today. I will probably close the short small caps position later today.

I got creamed

OK I admit it.. I got creamed by the market today. All the broad indexes fell by about 5%+ today. The S&P is now at 805. My invested capital fell by about 10% and my total capital by about 6%. I have four choices now:

1: Close out all long positions and move to cash.
2: Close out all long positions and go short.
3: Open a new short position for a hedge and if we go lower from here dump my longs and increase the hedge, if we go higher and break 820-ish on the S&P on volume then remove the short hedge.
4: Do nothing, wait and see what today (the 21st) brings.

Here's what I think is happening. We are in the middle of a Presidential rally - that will probably peter out at 950-ish. I was expecting 1050 last week, but after today's decline I don't see the market breaking the high of January 6th.

The problem is where is the bottom of the current move downward. If it's here or 790-ish, it makes sense to sweat it out. On the other hand it could very well be around 740-ish. In which case I should go with 1 or 2.

I am long from 850 and I could bear a drawdown to 790 - but anything more would be stupid. So here's what I am going to do if we break today on volume I will dump all my longs and be on cash.

So for today it's #4.

The more things change...

The more they remain the same. On my way to work, the local radio had interrupted its program of non-stop Bollywood music (of the kiss me- kiss me fare) to talk about Barack Obama's inauguration.

As the 44th president of the US, his story, eloquence and the fact that we are a relatively pro-American country has caught the attention of the ordinary Indian. The expectation seems to be that he is the messiah come to deliver America and the world from:
1: Financial Meltdown
2: Terrorism
3: Over-reliance on Petroleum
4: Environmental Degradation

Being the messiah may just be too heavy a cross for one man to bear. But even if he were Jesus/Buddha/Gandhi/ML King/FDR/Abe Lincoln re-incarnated, the simple truth is that human nature NEVER changes. The same mistakes that we committed in the 1930s we are condemned to commit again.

The roaring 20s brought about a generation of people used to easy money and booming markets. They learnt their mistakes, suffered pain and put in place a host of regulations and safety nets. But once that generation passed away society has gone about making the same mistakes again.

Just like the 20s we have created another easy money bubble and re-priced risky assets. And just like the 20s this bubble will have the same outcome - for the simple fact that human nature is STILL the same.

We will go through the same deflationary spiral that we did in the thirties. And this deflationary spiral will be followed by hyperinflation as the establishment desperately tries to control the force of nature by printing money. This hyperinflation will create a class of people who will be wiped out. With nothing left to lose this class will take upon themselves to unseat the existing powers and put in place a new system of governance. This might be Fascism or Socialism reincarnated, or it might be some other -ism. Regardless the world will be a different place once the trough of this cycle is reached.

To think that one man, even if he is the most powerful man on this planet, can stop human nature from running it's course is wishful thinking of the first order.

Stocks Update

On Friday (16/1) I closed out all my short positions and went long. I expect the current rally in the S&P to top out around 980-1000 ish. At which point I will go short in force.

I am currently in the following positions:

1: Long Crude
2: Long Oil and Energy Index
3: Long Nasdaq 100
4: Long Big Caps (A proxy for the Dow 30)
5: Long Semi-Conductors, the SOX index
6: Long Agriculture Index
7: 40% Cash

For the record the short-gold stock was a loss, the short financials, short real estate and short small caps were all profitable.

The rise and continued rise of the dollar

I am watching the US$ like a hawk




Notice the US$ reach the 50-day MA. If it breaks that its very bullish for the $ and bad for commodities and stocks. For the record I am short Gold and short stocks. On a longer term basis it just closed above its 200-week MA. See the Weekly chart.

2009 For you

This seems to be the season for 2009 predictions, so for the first time I decided to put mine out there.

I'll start with the Economics first.

1: S&P500 will print a 5-handle this year. After a spring rally, the downtrend should resume in earnest in the summer.
2: SENSEX will touch 4000, the timing should be similar to the S&P's low.
3: This year people will stop talking about recession and downturn. They'll start talking about a depression instead.
4: US unemployment (official) figures will touch 10%.
5: There will be a currency crisis, but unlike most people I do not think the US$ will collapse (at least not this year). I think the currency crisis will be in Euroland or with the GBP.
6: India's IT industry will end 2009 in a much worse state than 2008. I fully expect the top 10 companies to layoff 50% of their staff.
7: Foreclosure and Repossession will make their appearance in general desi vocabulary.

Domestic (India) Politics.

1: No national party will win a clear majority. There will be a coalition government (and I'll hedge my bets here) probably led by the Congress and supported by a host of ne'er-do-wells.
2: Mayawati will NOT be the next Prime Minister. But she could very well be in the Union Cabinet.
3: Rahul Gandhi will NOT be the next Prime Minister. I suspect he will not have a very public role in the next government either.
4: Amar Singh and Mulayam will be marginalized by the congress in favor of Mayawati.
5: NCP will fare badly in Maharashtra. There will be a 3 way-split between the NCP, Congress and BJP-SS in Maharashtra. MNS will make its way to Parliament.

US Politics

1: Obama will lose his way and from the great "black" hope he will become one of many who over-promised and under-delivered.
2: There will be an undercurrent of rising resentment against the government. While nothing will be overt but 2010 might be the year that the American system of government changed to something else.

International Affairs

1: Pakistan will collapse, the mullahs supported by the Army will take over the government. Pakistani society will enter the dark ages.
2: Iraq will be peaceful, Palestine will not be.
3: The Indian Army will be overtly deployed in Afghanistan. First as advisors and then slowly to replace the NATO and US forces who will withdraw by year-end.
4: 2009 will NOT see an overt conflict between nation-states in South Asia, but 2010 will be another matter.

I'll come back same time, next year and see how I did.

Current Stock Positions

These are my current open positions

1: Short Gold - Rationale I am expecting Gold to fall to 790-800 is per ounce as the USD starts rising. Expected timeframe 2-3 months.

2: Short Real Estate, Short Financials, Short Russell 2000 - these are my chosen vehicles for the short-side plays of 2009. I expect the bear rally to take a hiatus till next week 19/1/2009 - ish. The S&P should retrace to 820-830ish. I will then close these short positions and go long.

3: Cash - approx: 20% of portfolio.

SAY you SAY ME - The Auditors

The SAY (Satyam) saga just keeps getting better and better. The CFO claims that the inflated cash balances were handled directly by Raju and he was told to keep his nose out of the business. In the meantime there have been calls for PwC's hide.

PwC of course is the hapless group of auditors who audited Bernie Madoff's feed fund the Fairfield Greenwich Group and now have this sordid tale to add to their list of accomplishments. However I "think" (with an emphasis on the word think) that PwC may not be complicit in this particular case. Here is what I think happened.

1: Raju pledges his SAY shares for a margin loan.
2: Raju takes the margin money and pumps it back into SAY's accounts. Thus the bank balances now show inflated amounts.
3: Raju inflates the Revenue numbers which tie in with actual cash in the bank.
4: The bank's provide valid statements showing cash balances.
5: PwC certifies the cash/bank balances.
6: Raju then siphons off the bank balances and uses it for his nefarious purposes.
7: Raju proceeds to repeat steps 1 through 6 every quarter, each time pledging more and more of his shares. Until
A: He runs out of shares to pledge.
B: Is unable to raise cash any other way, and with quarter-ending coming up is desperate to show that he has money in the bank.
C: He comes up with an ingenious idea, utilize the cash (he is supposed to have) to buy other assets. Since he happens to be the seller he has no problem being paid in fictional cash. The auditor now receives a bank statement showing reduced balances and certifies the same. The cash flow statement shows an outgo due to a financing activity and all is well.
D: Scheme C - collapses and the rest is history.