Inexcusable

DI was distracting me today. Inexcusable mistakes. Filled out the order incorrectly. Geez!

Ending Balance: €408,111

Another Wild Day

300 pts range, another scary day!

Didn't do much today. Still holding long: BAC, C and EMC.

DJIA opened stronger than anyone would have expected but took a turn about 1:00pm EST. It dived from 7800 to 7550 in 2 hours and almost had me sucked in. Glad I waited while the bull and bear were fighting it out around 7580. DJIA shot right back up at 3:00pm EST to close at 7750.

Volatility will likely remain high in days to come. Expecting a positive opening tomorrow morning but  jobless claims and 4th quarter GDP (both due out at 12:30pm GMT) may turn it around.

Looking for opportunity to short Amazon (AMZN), Netflix (NLFX), Barnes & Noble (BKS), Palm (PALM).

Ending Balance: €369,964

Easy Money

The Geithner's plan provides an opportunity to make easy money big time.

First this is how it works – the Geithner's way:

Geithner's plan is not as complex as it seems. The main objective is to get a “price” for the so-called “toxic assets” by creating a market for them. If the plan works out as it should, the “market price” will be above their net book value currently carried in the banks' balance sheet. This will improve the banks net worth and encourage them to lend and perhaps, more importantly, allow some of the banks to remain solvent. This is more attractive than insuring these toxic assets (as the UK Government did) as the US Government will benefit from any subsequent increase in the “market price” - an insurance scheme, on the other hand, will pass all potential benefits to the banks while guaranteeing to take up all the potential losses.

In order to give incentives to the private sector to participate in creating this market, the US Government will chip in $1 (from TARP) for every $1 of private fund. In addition, the FDIC will provide a 1:6 leverage as non-recourse loan (it means that the private investor's maximum loss is capped at the $1 he put in and he doesn't have to worry about the $12 loan made available to the partnership).

In essence, for every $100 the partnership has at its disposal, the private investor only has to put in $7.14 – the Government will make it up by matching it with $7.14 from the TARP fund and $85.71 from FDIC in the form of a loan.

Now time for easy money.

How sweet this deal can be (or the potential hiccup of Geithner's gamble) is what the “market price” the partnership will pay and what price the banks are willing to sell these “toxic assets”. Given the huge dose of sweetener from the US Government, the private investor will likely price the “toxic assets” higher than what they would otherwise be in a free market. Hopefully, the banks will sell at this government subsidized price. But will they?

If the private investor can see that there is a potential gain in acquiring the “toxic assets”, so will the banks. Why should the banks be selling something that will generate a reasonable return? Unless, of course, they are forced to sell (possible through the stress test to be carried out) or the price is so outrageously attractive as to exceed any potential return. In the former case, it's easy money for the private investor at the taxpayers expense. In the latter case, the bankers will benefit, also at the taxpayers expense. It will never be a win-win-win situation as some of us may have wished. It guarantees a win-win-lose situation.

If you believe the first scenario (bank forced to sell) will pan out, it's time for us to pool some money and queue up for some truly under-valued assets in your lifetime. There is no restriction (except for the banks themselves) for anyone to set up a fund to bid for these assets. If you believe the second scenario is likely, go all-in for bank shares – guaranteed 100% return.

And there is the third scenario but players will be restricted to senior bank executives. We cannot join in, unfortunately.

Although banks are barred from bidding these “toxic assets”, there is nothing to prevent bank executives doing it through the back door by setting up a private fund anonymously or pool their money into an existing fund to bid for these assets. To guarantee an attractive return for these funds, all they have to do is agreeing to a rock bottom price for these assets. This is why I think the Geithner's plan will work because if I were a senior bank executive, I would be a fool not doing this (especially now my retention bonus is gone).

As always, a small group of people will benefit and it's not going to be you or me. And forget the second scenerio, it won't happen.

Ending Balance: €373,968

Week Ahead 23/03/2009

The last trading period for the 1st quarter coupled with announcements of some very important stats. Next week will be hugely significant.

Geithner is expected to give details of the bailout. My bet is that the announcement will come either Monday or Tuesday before Obama's scheduled prime-time speech. This will be the only positive for the week. Whether this is enough to out-weight all the negatives will dictate the overall direction of the market. There will be quite a few negatives to overcome:

Monday: 2:00pm GMT - existing home sales in Feb is expected to have fallen from Jan's 4.49 million units.

Tuesday: Obama's prime time speech.

Wednesday: 12:30pm GMT - durable goods orders - expected to dip 2% after Jan's 5.2% drop.

2:00pm GMT - new home sales - expected to have fallen from Jan's 309K units to 300K units.

Thursday: 12:30pm GMT - Jobless claims expected to deteriorate. 12:30pm GMT - 4th Quarter GDP - expected to have shrunk to 6.6% as compared to earlier reading of 6.2% - worst in 26 years.

Friday: 12:30pm GMT - Personal Incomes - expected to have fallen 0.1% from a slight increase of 0.4% last month.

Expecting some wild swings. Not for the faint-hearted. I'm holding a net long position over the weekend.

Who Want $ When 1 Trillion Is Being Printed

The late rally after Bernanke decided to "print" hurt. Had shorted BK and decided to hold onto the loss overnight. €44,000 was a substantial position.

Would have been a miserable morning with such a large loss position. There wasn't much happening in FSTE and decided to switch my long GBP/EUR position to long GBP/USD at 1.4348  about 11:20am. It proved to be one lucky switch and almost covered my entire loss in BK in merely 2 hours. The dollar simply dived to 1.4550 after the switch.

Took my loss €27,200 in BK immediately after the opening bell when the share priced dipped despite a higher DJIA opening (was thinking to hold it until 2:30pm when the jobless claim may push the index down a bit more but I was scared).

I think I'm done today. Already have had too much.

Ending Balance: €336,420

Don't Fight

Don't fight the market, idiot!

Ending Bal: €307,558

Profitable, No One Ever Doubts That

Last week's rally was fueled by a coordinated announcement from Citigroup, Bank of America and JP Morgan Chase telling us that their banks had been profitable for the first two months of the year.  Well, who would ever doubt that their businesses are profitable?

The problem is their balance sheets, not their income statements. And until they or the US Government know how to deal with the inflated asset values, the rally will likely be short lived. Changing the rules may help but then again we must realize the potential long term consequences of changing the off-side rule in the middle of a ball game. The referee will easily end up playing the game all by himself.

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Wednesday - UK unemployment. Short GBP?

Thursday - application of 1st phase of TALF fund closed. This works exactly like an increase in the spending limit of an already maxed out credit card. Should help in the short term.

Black Friday

That's it for me this week. The only regret was that I didn't fully maximize my gain. The BoA long was terrific. I held it over the weekend and for Monday night - caught the wave nicely but could have done a whole lot better if I had given it one more night.

It's black Friday and I'm very superstitious. No more trades today.

Ending Balance: €267,289

Target

When set target is reached, follow thro. Don't bet against it. Repeating the same old mistake.

Current Bal: €247,229

Anymore To Sell

HSBC's position was closed as I placed at stop-loss at 330 which was breached early yesterday morning after the mass sell off in Hong Kong. BoA, however, seems so far a good long position. Have 36 pts in the pocket and should expect at least a mini-rally today as stock market is pointing to a positive opening.

A$/¥ cross is doing well. Long @ 62.57 with a target at 65.00. The hope that repatriation of ¥ for some window-dressing accounting as the 1st quarter comes to an end may not be enough to pop up the currency. There simple aren't much earnings to repatriate when they are making losses, huge losses. Australia is the only western country which hasn't officially gone into recession. Can be a good bet here.

Current Bal (excluding open P/L): €132,685

Almost Anticipating This

HSBC down 15% ahead of right issues. Position Closed.

Ending Balance: €108,774

Need More Financial Advice?

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Short Into Any Rally

Easier said than done. With the market getting so cheap, the temptation to long something is hard to resist. Did just that and the entire day became almost unbearable. It would have been a disastrous day if not for the late rally (all within the last 5 minutes before closing). It saved my day.

Still holding BoA and HSBC long for the weekend - this is not good as I just broke my own rule not to roll over any stock holdings overnight. But a re-bound is long overdue - there isn't much left to sell. Let's pray.

Ending Balance: €127,600

More QE

I'm a fan of Hugh Hendry, CIO of Eclectica Asset Management. Here is his view on QE (Mar 2, 2009 CNBC)

QE

The hottest words on the planet at the moment - Quantitative Easing. For a novice like myself, it means printing money. For experts in our Government, it means re-capitalization of our failing banks in a less than direct way - the Central Bank (Bank of England or ECB or Fed depending on where you are living) will purchase gilts (government IOUs) and commercial papers (private IOUs) from the failing banks. The sellers can then use the extra fund to strengthen their balance sheets and therefore enable them to lend again. The Central Bank can generate the fund needed for the purchases either from foreign investors (called borrowing) or by pressing a button on the computer (called QE).

No one can be sure if QE will work to save an economy deep in recession as it is not anything new but had been tried many times in the past, most notably by Japan in the 90s and Zimbabwe since Mugabe.

The argument for QE is that it will inflate away the huge amount of debts we have accumulated. As we are unable to repay the debts, inflation becomes the only viable option to get rid of them. Furthermore, we are a lot smarter than Mugabe. We will constrain the inflation to 2% and won't allow it to run wild by increasing the interest rates once it gets any near to our 2% target.

Smarter or just fanciful, I'm not sure. By keeping the inflation to below 2% simply won't be enough to inflate away the debts. We will be carrying not only the same amount of old debts but also new additional debts created as a result of QE. We would need double digits inflation if we were to inflate away our debts. Obviously, if this is to happen, you can safely throw away your leather wallet and buy a few of these bags instead.

One analogy comes to mind is this:

We have maxed out our credit cards. The standard of living we are used to cannot be sustained through borrowing anymore.

Option 1: Work harder. Get 2 or 3 jobs if necessary. Forget the overseas holidays. Dine out in McDonald instead of the fancy Japanese restaurant. Forget the nightclubbing, watch TV at home with your kids. If we can do that, we will be gradually repaying our debts. It's not easy and it is extremely politically unpopular to the point that no politicians will have the gut or will to push through a policy like this. It calls for massive increase in productivity while at the same time administrating a substantial pay cut in order to regain our competitiveness globally. It will also mean higher taxes so that we have enough to maintain the essential public services.

Option 2: Apply for another credit card. In normal circumstances, the application will be turned down because our existing credit cards are already maxed out. But this is exceptional time and the Banks are under enormous pressure to lend, to issue another credit card to us. Without the new credit facilities, we won't be able to spend. And if we don't spend, the economy will go into a downward spiral.

In order to encourage the banks to issue another credit card to us, the Government has injected fresh capital into the banks in the form of bail-out money and lowered the cost of money through numerous interest rate cuts.

But the Government soon found out that these actions weren't enough to convince the banks. As a last resort, the Government turn to "inflation". Inflation is a powerful tool to vaporize money, whether it's debts or savings or pensions. The Government doesn't give a damn to you savers & pensioners out there. If you save your money in a bank and don't spend it, it's bad for the economy and therefore should be penalized. If you have debts, whether as a result of gambling or stupidity, you should be rewarded or at least saved.

DOW was making new lows today. Plenty of trading opportunities. I'm not trading as often as before. FTSE needs to go above 3,730 before it has a chance to recover.

Ending Balance: €103,000

More About Timing and the Market

• Think. The market won't fool you - just don't fool yourself;
• Patience. A good idea implemented at the wrong time is the worst possible experience a trader can get;
• Forget your conviction. It is most probably wrong if the market doesn't confirm it;
• Timing is critical. The market won't punish you for not making a trade but will kill you for making a trade at the wrong time;
• Do your homework. The decision making process cannot solely rely on indices nor can it be done online in real time.

And of course, we need luck! Good luck!