Here we go!

So as the forecast on December 8th, 2009 predicted ("Short-Term Dollar Strength on Worldwide Crappiness") the Euro is now within spitting distance of $1.40 to the dollar. So far so good. But the ferociousness with which it smashed though its 200 day moving average makes me inclined to wait for further weakness rather then booking profits now. I believe that the Dollar will certainly hit $1.35. Depending on the management of the Grecian crisis, the Euro easily could fall further but $1.35 is a recurring motif I feel comfortable with.
(It was the exchange rate when I first started paying attention to the markets in 2005, it was the rate just before the panic began in late July 2007, and there has been a lot of congestion around $1.35 over the past year.)












In other news, readers of this blog will note that I have been pretty bearish throughout the past year. Not to the point of outright shorting the S&P 500, but certainly not holding any long U.S. equity positions either. The theme since December 6th, 2008 has been to pursue a simple "reflationary" strategy, with a diversified portfolio split between base metals (LD, +141%), rare metals (1211.HK, +524%), junk-bonds (PHDAX , 46%), Brazilian and Indian Equities (EWZ, +156%, INP, +129%), and Inflation-Protected Government Bonds (TIP, +11%). This strategy was intended to be long only, with a "buy on dips" mentality.

I believe it is time to close out this portfolio and move to cash. Investor bullishness is the highest its been since 2006. China is removing liquidity. The VIX is near its 3-year lows and Junk-Bonds have returned to yields not seen since the moments before the panic in July 2007.

We may be moving into a new phase of the crisis. The big story of the Panic of 2008 was the run on the "cyber" banks, the money-market accounts where investors park their cash. The sudden withdrawal of cash from these accounts after the Primary Reserve fund "broke the buck" ushered in a wave of forced selling as money-market accounts sold their investment holdings to meet redemptions. We are unlikely to see a liquidity panic of this sort again. It is likely that the troubles in Europe will spread in unexpected ways. The specter of a Greek sovereign default will seriously undermine faith in the European Monetary Union, and until there is a clear protocol for dealing with the Greek crisis, we may very well see a solvency panic of the sort which accompanied the failure of Lehman Brothers.

I am not suggesting that this crisis is imminent, simply that the December 6th, 2008 portfolio reallocation has made stunning, one-in-a-lifetime returns, and there is enough uncertainty to the outlook to take a breather and reflect.

I am a firm believer that equity investors must be burned three times before a true bull market can begin. I've never read this anywhere, it simply seems like a prerequisite to the necessary capitulation which allows assets values to reach appropriate valuations for the onset of a bull market. I mark the bursting of the tech bubble as burn #1 and the panic of '08 as burn #2.

As a corollary to this thought however, I would reiterate my comments of last spring. The questions regarding L, W, or V shaped recoveries are misplaced. With the increasing globalization of the world financial markets and the shifting demographic patterns between developing and developed markets, I believe we will see a W-shaped recovery in the 1st world and a V-shaped recovery in Brazil and India.

We may very well be approaching half-time in this (so far) three year long bear market. Don't let anyone try to fool you into thinking otherwise.

To FT Alphaville being the only news source worth its salt, assuming we're talking 15th century salt in the Sahara

I came across this old article today. It was published (though I hadn't heard of Alphaville at the time) on June 14th, 2007. This was about a week after I quit investment banking and took a job as a carpenter at the Met Opera because I was scared shitless about the future. It was also about the same time as when some idiot Private Equity guys, "Sageview," bought Guitar Center for (I'm not kidding you) $59.99... which just shows they can be suduced by a 99 cent sticker price as much as their average customer.

(I find this Guitar Center leveraged buyout especially precious because it epitomizes the era of cheap credit. This was some deal! Guitar Center, a business whose entire business model is predicated on making 0% interest loans to the least credit worthy segment of the population, "musicians," was bought by Sageview, which payed almost entirely with money they borrowed cheaply themselves!!! Amazing!)

It was also about this time, that my dad, my sister's boyfriend (ex-Goldman Sachs, then Private Equity) and I took a car ride together. We began discussing when we thought the crash would come. "Shit," my dad said, "I just barely broke even to where I was 7 years ago." David, my sister's boyfriend, stated "My colleagues think within 6 months," in his typical diplomatic fashion. "I'm going to apply to business school." I was more equivicable. "As soon as the first big private equity buyout falls through. I don't know. Soon."

Sure enough, six weeks later, financing for the biggest LBO in history, the buyout of Chrysler, fell through. And the turmoil began. "I feel queasy," I wrote to my friend Elizabeth, the morning I read the news. ("This sucker could go down" is what I ment to say)

Anyway, back to the point. On June 14th, 2007 FT Alphaville published this story: http://ftalphaville.ft.com/blog/2007/06/14/5207/you-know-theres-a-bubble-when/
the conclusions of which I will repeat now. (You can read the details yourself.)

You know there's a bubble when:

1) It’s not just Hedge-Fund Guy and his trophy wife demanding splendid isolation from cattle-class rubberneckers eyeing their chocolate-dipped strawberries. Revolution Air, a charter company, will fly more than 20 U.S. kids to summer camp this month, at about $8,000 a hop, the New York Post reported last week.”

2) “You have to get the price right, or it will come back into the market,'’ Hirst told Bloomberg News reporter Linda Sandler. “A lot of people buy things and flip them.'’ You know there’s a bubble when artists are trying to set their prices so high that there won’t be a secondary market for their work.”

3) The zeitgeist-defining product among the free-range bananas, organic spring water and corn-fed soup is a 60-year-old Vecchia Dispensa balsamic vinegar, costing almost $200 for a triangular 100 milliliter bottle stoppered with red wax seals. You know there’s a bubble when an overgrown US chain store can sell antique vinegar to Britons at 32 times the price of Nicolas Feuillatte champagne.” [I swear by their 25 year old vinegar, by the way. Why not? Its the same price as a good crappy bottle of wine and can be used with 50 times as many meals -Matty]

4) It was a rather special chair. Emperor Kangxi graced the gilt-incised brown lacquer throne when he ruled China between 1662 and 1722. Still, Ho could have picked it up for just $43,700 when it sold in 1994 instead of HK$13 million. You know there’s a bubble when a gambling mogul drops a couple of million dollars so that his buttocks can polish the seat of royalty.”

5) “Flip a switch and this feature will maintain your drink’s temperature up to 140 degrees. It can also cool to a refreshingly chilly 35 degrees.'’ You know there’s a bubble when the latest innovation in automotive engineering is a gadget to keep your bucket of Starbucks’ Costa Rica Tarrazu hot enough to guarantee third- degree lap burns when you brake for that road-running child.” [Invented by Chrysler by the way]

6) This week, the philatelist auctioned the set in New York for $9.1 million. “It’s four times profit,'’ Bill Gross said of the price. “It’s better than the stock market.'’ You know there’s a bubble when tiny, lickable portraits of Queen Victoria are a better store of value than stocks or bonds.

7) “The word “bubble'’ has appeared in 94 Bloomberg News headlines this year, up from 40 in the year-earlier period and from 85 in all of 2005. You know there’s a bubble when there’s a bubble in usage of the word “bubble.'’

Happy New Year, everybody!