Fundamental Trading Diary

Fundamental analysis of the capital markets

General Update

I haven’t done any trades recently. My last couple of calls were very right (hey – it happens every once in a while) and were worth about a 15% gain.

The relationship between stocks, bonds and currency seems to have come unglued. Since late 2003, the USD has moved inversely to US stocks. This naturally makes a fair degree of sense: if a is priced in b, and a moves, so to will the number of b‘s it takes to buy a. What it also tells us, which we already intuitively knew, is that there was a lot of new debt money going into stocks, and even more going into commodities.

Economic cycles are a normal, healthy part of our economy. They wring out the excesses and inefficiencies into the economy, and free up labour and force the hands of wealth to put their money into more viable businesses.

This natural economic evolutionary mechanism has a few requirements to work effectively. Mainly, it relies on a liquid and stable medium for this transfer to occur. If this does not exist, it will actually cause more imbalances. This economic downturn probably should have happened several years ago, but it was prolonged by a massive and continuous increase in monetary supply. Of course, the problem now is that has lead to an asset bubble in mostly everything, new debt created using each incremental gain as collateral.

This leverage has led us into a situation where the supply and demand of everything from money to corn has become magnified. In the end, we can only save one of our money and our asset prices. Let’s examine the consequences of taking either course.

Saving our Money

This requires we stop our dramatic increase our monetary supply. The pause or contraction of monetary supply causes depressions. The last major contraction caused the great depression.

Saving our Assets

To save our assets, even more money will need to be created to chase it. Here’s the problem: this has already happened, and the system of lending has become so top heavy that it’s been swaying in the wind. This swaying has caused panicked investors to pull their money and stuff it into commodities like oil and gold. At the same time, high energy prices that his leads to kills the economy and cuts demand for the assets we were trying to save in the first place. Woops.

Trading Strategy

This, of course, has been a theme for a while, and will continue to be. I can’t predict the actions of our future leadership, but the sure bet is that neither is good for stocks as a whole. Oil has had its $150 blow-off top, and stocks have temporarily been buoyed. This will not last. I think it’s very safe to say that the Dow will hit 10,000 before it goes above 12,000 again.

Short 1 NQ contract at market open Monday morning.

This is a dead cat bounce. The market seems to think oil going down is a good thing. It’s in fact indicative of very bad things.

Update:  sold 1 NQ at 1921.00.

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August 9, 2008 - Posted by | Uncategorized

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