Weekly Train Wreck

Happy 2,000!

That's right, we've now given up 2,000 points from Friday, May 16th, when I thought the run back to 13,150 was overdone and that oil prices, then at "just" $125, would wreck the economy.  In that weekend's wrap-up I said I expected a drop but I made the mistake of attempting to anticipate a top to oil and a bottom to the market earlier this month and we have, so far, found neither.  By Monday, the 19th, I had turned "doom and gloomy" and said "I know I’m worried about the markets when I spend more time than usual reading the travel section of the newspaper, thinking of all the nice, relaxing places I could be this spring if I just cash out."

I went on to project:  "We still need oil prices to back off, we need the dollar to show some real strength and we need to do something to stop another 200,000 families from losing their homes this month or how can we be bullish on this economy?  I think the global economy is strong enough to carry us through a downturn, but not one in which we throw so many of our own people under a bus, not to mention the millions around the world who are starving to death as our traders get fat off commodity profits." 

Well, clearly no changes there!  I reprinted my article on how to solve the mortgage crisis and I already have a quick solution to the oil crisis but still Bush doesn't call me!  It's not so much that he doesn't call me that bothers me – it's that he doesn't seem to call anybody, or do anything… at all… ever!

On Tuesday, the 20th I pointed out: "Fed Gov Kohn gave the mandatory "Do not panic, all is well" speech this morning, which seems pretty ridiculous with oil racing up to $130.   "In the near term," he said, "consumer spending should see some lift from the tax rebates households receive as part of the fiscal stimulus package. He cited economic studies suggesting a "noticeable" share of households "respond reasonably quickly" to such stimulus measures."  I don’t know about you but this kind of total BS from our government officials is exactly the sort of thing that does make me panic!"

On the whole, we had a pretty good month in May as I went fairly bearish and the market dropped back to 12,500 but where did I go wrong?  We did not had a good June as I thought we'd hold 12,000 and bet accordingly and July is off to a rotten start and I have to wonder if it's possible that the top could have been so obvious to me but now I'm seeing a false bottom…

Predicting the markets is difficult at the best of times and I outlined my premise for why I think oil will stall and the markets will recover last week.  A lot of this week's 300-point drop had the feel of a forced bottom although it would have been nice if the volume was stronger but, perhaps, this is as good as it's going to get over the summer. 

As we had a very good first half of the year, I've elected to take a chance and press a bottom call the past two weeks.  This is a follow-on to the strategy we discussed back on May 19th where I said, if it were up to me I would cash out and take a vacation but, since it's my job to play, we're going to position ourselves for the recovery.

At this point, we've gone from 70% cash in our Long-Term Virtual Portfolio to 75% invested, a huge change and we are now at the point where we can't just keep rolling down if the market continues to fall.  As members are well aware, it drives me crazy that so many of these problems are so easy to fix yet the administration sits by and does – not only nothing because nothing would let the market fix itself – but the stupidest possible things they can do (throw money at commodities, maintain tension with Iran, press for tax cuts which hurts the dollar, borrow more money, discuss an energy policy, drilling, that CAN NOT have ANY effect for 10 years…) EVERY SINGLE TIME!

Someone might conclude that the administration is actively working to undermine this country's economy and is purposely selling us down the river to the Saudis and other oil interests in order to line their own pockets as their 8-year reign of terror draws to a close but not me as I have made a mid-year resolution not to be a conspiracy theorist so I will just say that this is, by far, the least competent administration in American history.  Please though, don't send me hate mail, I'm just telling you what the historians are saying as 107 out of 109 of them rate the Bush Presidency as a "failure" and 61% of historians surveyed now rate him as the worst President EVER…

So, whether it is by sheer incompetency or by deliberate intent, I am BULLISH because I say as America to this awful, AWFUL administration "Come, on – it that all you've got?  We're still standing!"  You can fail to catch Osama (year 7), you can lose the entire City of New Orleans and fail to repair it (year 4), you can put us $4.5Tn further in debt, you can allow energy prices to go up 7 times what it was when you took office you can triple the cost of food, you can drive 3M people out of work, you can drive 4M people out of their homes, you can allow $450Bn to be lost in the mortgage market, you can oversee the death of one of Wall Street's oldest investment houses, you can pursue a disastrous war and foreign policy, you can roll back decades of environmental progress, you can drive consumer and business confidence levels to the lowest levels in history – BUT WE ARE STILL STANDING!

If you ever doubted that this is the greatest economy in the world, just look at the abuse it is able to take and still survive – it is truly amazing how adaptable and resilient the US economy truly is in the face of such an unrelenting onslaught of (again, not going to call it a conspiracy to defraud and rob the American people) of incompetence.  If we can function this well with the threat level set to "Yellow" (it's always yellow) imagine what will happen when our long, national nightmare finally comes to a close.

With 6 months left in the current administration and the looming threat of John McCain still on the horizon, it is indeed a tough time to put our faith into the markets but being a bear now means that, even in an election year, we feel that nothing will be done to address at least some of our issues.  I know my gal Nancy Pelosi has gotten the ball rolling on my proposal to release oil from the SPR and has sent an official letter to Bush and she also issued the following public statement:

“The fact is that the Bush Administration is sitting on 700 million barrels of oil, purchased with our tax dollars, in the Strategic Petroleum Reserve.  That oil was purchased for an emergency, and with gas at $4 a gallon, it is an emergency for America's families, for America's business, and for our country. 

“The first President Bush released oil from the SPR.  President Clinton released oil from the SPR.  This President Bush released oil from the SPR.  We want him to do it again.  In 1991, the release of oil from the reserve caused an immediate reduction of oil prices of $8 per barrel.

“Americans convinced the Bush Administration to not keep filling the SPR a number of weeks ago.  We are calling upon them now to free our oil, call the White House, e-mail the White House so that we can increase the supply to reduce the price at the pump.  The President's number is ( 202 ) 456-1414, and his e-mail is comments@WhiteHouse.gov.”

This is coupled with the action of StopOilSpeculationNow.com, the campaign spearheaded by airlines and other Transport companies to push Congress to take action to reform commodities trading, something I've been talking about for two years and has finally "gone mainstream."  So I think change is finally in the wind and there are a host of possible actions that can be taken that can right this economy and cause the markets to take off so my plan is to be in position not to miss it.  It's a lot more speculative than we usually are and betting on America has been a losing proposition lately but I really don't think there is anything wrong with this country, just it's leader. 

With Bush's popularity at record lows and a looming election coming up, I don't think we have to wait for regime change to free the markets.  Congress needs to take action NOW as they are ALL up for election in November and even Scott Bensing of the NRSC has said about the Senate: "We have no safe seats right now.  In a normal election year, we would not be concerned at all. But those are the cards we're dealt. We're not taking any states for granted."  Unlike the President, who cannot be re-elected anyway (thank goodness!) the Republicans cannot afford to stay the course when the course is set to annihilation so I expect action sooner, rather than later.

In order to have confidence in the markets, we are looking for a drop in oil prices, action to aid actual homeowners and not just the banks that hold the mortgages, strong dollar action (as opposed to talk) and some good earnings numbers.  If you look at the timing of earnings season and the frenzy level that both oil and mortgage crises hit this week – we have to believe things are either going to get a lot worse or a lot better very soon.  I believe in this country and I believe that things will get better, with or without our "leader's" cooperation.

This is a very difficult position to take as the media, the financial giants and other hyenas are inciting fear and panic in their own reign of economic terrorism (terrorism is defined as "the systematic use of terror especially as a means of coercion." – see Fox news or the Wall Street Journal for today's examples).  You have to have faith that this country can recover and that putting the nation back on track with a real strong dollar policy and an end to insane deficit spending will help us regain confidence around the world.

It is important that you understand my investing premise before we get into this week's Long-Term Virtual Portfolio Review because I am making choices based on the above logic that our political and economic situation will change and that we will see a rotation of capital out of commodites and into technology companies and financials (as deals get done again), then manufacturing and, eventually, back to retail and housing.  It's not going to happen with oil at $145, it's not going to happen with FRE and FNM in doubt, it's not going to happen with the dollar below 72 but, if any one of those things change, we should get a fairly rapid improvement in the markets as they are currently priced for things to get much worse.

Meanwhile, we're treading water while we wait:  Our Short-Term Virtual Portfolio gained 18% thanks to our index puts, Both the Long-Term Virtual Portfolio and the Stock Club Virtual Portfolio remained flat for the week, the $10,000 Virtual Portfolio gained 10% and is still mainly cash but we dropped 10% as we put more money to work on our $25,000 Virtual Portfolio, rolling the dice on a rebound next week.  Our Stocks Virtual Portfolio had an amazing week thanks to our FRE and FNM bets and picked up 9% while Complex Spreads wiped out more GOOG and AAPL callers and picked up 7%.  It still remains a Day Trader's market as that virtual portfolio jumped 24% for the week and it all went back to cash so we are now just 30% invested and ready to have lots of fun next week.

I wish there were a more painless way to pick a bottom but the only way to get ahead of the curve is to take a little damage at the bottom.  We need to be very realistic about what happens next week and fall back to a more conservative strategy if we break below 11,000 but I'm really hoping something comes out by pre-market Monday to let us put the GSE issue behind us so we can get back to focusing on a very busy earnings week.

 Overall, we closed 63 positions with an average gain of 24%, we're really scraping the bottom of the barrel though as we've taken out most of our callers and are left with some very red positions in our virtual portfolios.  Now would be a really nice time for a rally or we're going to have to cover more than we wanted to and risk getting burned to the upside.