Crying Wolf

So..by now perhaps many of you are thinking that I was crying wolf.  I’ve never claimed to try to be 100% correct.  And right now, while the market has tightened up, it could still go either way.  I’m still 100% cash, but if things start looking better, I might tentatively put my toe in the long water, as many leading stocks are starting to come to life (but many others are not — the market is quite conflicted at the moment).  I’ve recently read a most fascinating book:  ”The Wave Principle of Human Social Behavior” by, once again, Robert Prechter.  This book includes what I think is by far the best model of human behavior as related to the stock market, basically applying fractals to our herding instincts found in the limbic portios of our brains, translated into mass optimism vs. pessimism, and measured by the stock market.  Absolutely fascinating, and it takes my original theory to a whole new level.  Unfortunately, Prechter has been a permabear since 1995!  And while he’s been right, twice, about massive crashes, he’s been completely wrong about the timing for a very, very long time.  Most of the other sources I count on are either uncertain, or still expecting a crash.  I think our debt problems could go either way: a massive crash (triggered by Hungary/Italy/Greece/China/Iran — who knows) leading to a very big depression, or perhaps we’ll have very slow growth for a very long time, as happened for 20 years from 1870-1890.  I’m not much more positive than that, although I’d very much like to be.  Net, net, the risk is still quite high that we’ll have a big crash, but I think it’s a tad less than it was a month ago.  Unless you’re willing to get out very quickly, I do not currently recommend any long positions.

I’ve had many, many interesting discussions since my last post…generally ranging from “I don’t believe you,” to “I believe you, but I’m not going to anything about it.”  First, let’s just say this.  I could be wrong.  And after playing years of poker, training my brain to make bets with limited information, based simply on probabilities, I’ve learned that I’m often wrong.  In poker and investing, no one is right 100% of the time, so you learn from your mistakes and attempt to minimize future losses.  Now, let’s look at my investing track record.  I started seriously investing in 2008.  And by that I mean I determined that there was not one stock on the market that I thought was valued fairly enough to warrant purchasing.  Based on very, very simple financial math, I stayed out of the market.  Look what happened…the market crashed…one of the worst crashes in history.  In March of 2009, a friend called me saying she had been laid off.  I said to her, “You know what, I bet you got laid off on the very day of the bottom of this thing.”  I determined that by the absolute sheer panic that was emanating from  CNBC that day…and from my research, this emotional bottom is almost always when the stock market bottoms.  I started investing in Apple and other leading stocks one week after that day.  And I’ll never forget, about a week after that (two weeks after the bottom) I told some co-workers that I was back in the market, and they implored me to get out — they were practically screaming at me.  They thought I was crazy.  Well, look what happened.  We had an absolutely wonderful 2 year bull market.  And when did I get out of that bull market?  About a week after the top, a few months ago.  Why did I get out?  Because by then I was a much better trader, and could read charts.  And the leading stocks were indicating major problems with the market.  So once again I was in cash for the recent “mini-crash.”  And from the sidelines I then watched the market go absolutely crazy.  The volatility was so enormous that serious, serious red flags were going off in my head.  So I started more research to find out what was going on…something way beyond my original hypothesis of an 18 year real estate cycle was happening.  And then I ran into Elliot Waves, Robert Prechter and fundamental analysis on the world wide debt bubble…which to me explained everything.  It fit so well (as I’ve written in the past), that I could not help but to believe it.  Robert Prechter was on CNBC the other day…even the announcer didn’t believe him…and that’s been my experience:  no matter how much street-cred I might have gained with the above story (you CAN time the market), if you don’t want to believe me you won’t.  It’s the reason why those in the know will always be able to take advantage of those who choose to simply ignore what is happening and hope for the best.  And by the way, there are plenty of other sources now saying the same thing…the crescendo is getting quite loud.  So if/when this crash hits, if you read this blog, don’t be one of those who says, “How could I have known?”

And what kills me the most about those of you who are still in the market, yet who read this blog, is that there are very few instruments yielding more than 1%!!!  And if you’re in stocks, they take far longer to go up than they take to crash.  So let’s say there’s a remote 1/6 chance that I’m right, here’s the math:  If you’re in bonds: you’re reaching for 1-2% yield and playing russian roulette with anywhere from a 25-100% loss.  Would you put a single bullet in a 6 shooter, spin the barrel, and put a gun to your head and pull the trigger if someone said I’ll give you 2% more lifespan if you don’t kill yourself?  It’s the damned same bet!!!!  If you’re still in stocks…the only thing that will save them is if Europe miraculously solves its problem, and the U.S. puts itself on a path to fiscal sanity.  And you’ll know exactly if and when both of those events happen.  Until then, stocks are going nowhere – same crazy trading range they’ve been in for some time – or they’ll die.  If you get out, the worst case is that you’ll lose a few days of upside.  That’s your bet: a few days of upside versus a potential catastrophic loss of your savings.  Doesn’t make sense to me…

Stay safe.  Please.

View the full VIX chart at Wikinvest

Getting the daily timing of this is very, very difficult.  But, we are in for a major crash.  The VIX (volatility index) is declining along with a decline in the market (it usually goes up), which tells me that it’s quite possible the big boys are now sneaking into the market to sell (orderly big boy orders “cushion” smaller orders up or down, dampening volatility).  This is like a game…its’ likely that everyone in the know is sneaking in their sell orders…but once it becomes too obvious, that’s when the panic selling begins, with very few buyers.  I’ll closely watch the market tomorrow…I’m also waiting for one of my favorite indicators to issue a sell signal (just today it went to cash from buy — I’ve correctly ignored its last 4 signals (“Use the Force Luke”)…but this time I think it just might be correct).   The timing I’m basing on technical analysis…the fundamentals, well…we’re done.  Read the book Endgame: The End of the Debt Supercycle and How It Changes Everything last week. There is simply not enough creditors left in the world to backstop anyone.  Just today, in a buried article, I read the word ‘depression’ in a mainstream magazine, Business Week, referring to Great Britain.  They have far more debt relative to GDP than almost anyone else, except perhaps Japan.  You don’t hear about them because they have the ability to inflate their way out by printing the pound.  Greece/Italy is a bigger problem, because Europe will not bring themselves to “fix” (read: kick the can down the road) their problem.  The big wild card is the Fed.  Will they inflate our way out of this?  I have no idea.  The one thing about Robert Prechter (remember, he wrote the book that felt like I was reading a book to a movie I’d seen) is that he was wrong on his prognostications about how far the Fed would actually go.  But he’s been dead on regarding how everything else is trading, including Gold and commodities…all dropping, signaling deflation.  (Gold is NOT a haven right now.)  Cash is King.  I don’t even trust the U.S. gov’t to pay its T-bills (relative to the yield)…I’m just staying in cash, in the most trusted currency in the world, the U.S. dollar, and next week I’ll spread my money around some smaller local banks with a strong financial rating (www.weissratings.com – it’s free!  Use it, please) linked to a strong brokerage, Interactive Brokers (who, by the way, only charges a dollar per trade) so that I can buy my Puts when, hopefully this time, my timing is right (the Fed’s move two weeks ago only two days after I bought my Puts should indicate just how in tune I am with the market).  Stay safe everyone…unless you’re shorting, it’s just not worth it to be in anything but cash/T-bills right now…you may not get your money back for years, if ever.

Quite a rally.  I took my Puts off (I lost less than 1% of my portfolio, with the potential for upwards of a 10-20% gain in a few days).  We may have put off the inevitable for a while…I’ll be watching this quite closely.

I think what this does signal is that the Fed will be willing to truly inflate the economy, rather than risk deflation, which would be catastrophic.  We’re not out of the woods yet.

I just finished reading a book called “Conquer the Crash.”  This book was written in 2002, and it was like reading the book of a movie I’d already seen…except that I was living it for the last few years.  It’s written by Robert Prechter, who uses Elliot Wave theory (fractal waves applied the stock market) to forecast the market as well as sociological phenomena.  For any of you who have followed this blog from the beginning, please note that I started with the presumption of an 18 year real estate cycle that is created by pessimism/optimism in…us.  Now, after all this reading, I think I’ve finally found a complete, much, much longer term model.  What Prechter wrote fit so much of what else I’ve been reading that I have to believe it.   And actually, if I had read it without all of my other research, I never would have believed it (just like I began by poo-pooing technical analysis and now I find it to be my primary tool).  Prechter and his company Elliot Wave International are predicting a deflationary Depression due to our giant credit bubble bursting.  Yes, a Depression.  And I tend to believe it, because just too much is playing out almost exactly as predicted.

Why the title of this blog?  Because Buffet has been making big bets in U.S. companies.  He thinks stocks are undervalued right now.  I disagree, and I think they’re heading much, much lower.  Basic reason is that there is not enough money to back-stop Italy.  Anywhere.   Even if Germany would agree to do it.  We’re at a precipice…and I think Germany and France are going to let Greece/Italy fail to save their own skin.  The European banking contagion will then spread to the U.S. (just as has already started with MF Global).  Then our banks will begin to save their own skin, and will shut down lending.  And when the credit stops flowing in the U.S., again, our world wide bubble will burst (2001 and 2008 were mere steps in a much bigger credit bubble bursting).

But, I could be wrong.  So here’s my strategy:  I’ll take all of my cash out of my sweep accounts held at E*Trade Bank (because it might fail) and start buying short term Treasuries (if the Treasuries aren’t paid, I’ll be buying guns and ammunition — not literally (well, maybe), but the point is if the U.S. Government doesn’t pay its debt, we’re gonna have awfully bigger problems than how to trade a computerized brokerage account).  Then I’ll take about 5% of my portfolio and buy 2013 Jan Puts on QQQ (Nasdaq ETF) and GLD (Gold ETF).  Reason is this: Gold and the market have been trading almost lock stock with each other because no one is trading individual anythings right now…it’s all about how much money is available to buy anything — pure liquidity based supply and demand.  If I’m right about the macro picture, both gold and the market should continue to trade with each other for about another 2-3 months (steep drop).  If I’m wrong, gold and the market should lose their correlation, and I’ll lose less money or perhaps none if they go truly opposite of each other.  If I’m correct, both Puts should be worth quite a bit of money in about 3 months, and I’ll reassess and scale in more, depending on my outlook.  I was trying to pull this trade off today, but ran out of time before the market closed.

Net, net, friends and family.  Get out of the market.  Per the reason of this blog:  ”Just letting you know.”   By the way, I truly hope Buffet is right.

My last post was the exact day the October rally started (I think, didn’t check — but certainly close).  Three days ago, I almost wrote a blog with the quoted title.  The market indicator I subscribe to (it uses similar leading stock behavior techniques similar to those that got me out of the market prior to the recent crash) had finally gone to a buy signal.  Today, it went right back to cash.  I also almost invested a substantial portion of my portfolio back in the market.  Something held me back.  This rally was just too…weird.   The TV talking heads are cracking me up…every time the market goes up, they start saying everything must be fine.  When it’s dropping, they start freaking out.  Even Cramer said start buying (for all his bluster, he’s pretty good) last Thursday.  Oops.  A while back I titled a blog ‘Spooky’ and I was right…well, my hair is really standing up on the back of my neck.  Something is just…wrong.  I’m not going to make any predictions here, but I will say this: Elliot Wave theory (from my last post) actually made some sense to me, although I find it quite impractical to actually use to predict the market directions on a day-to-day basis.  Medium and longer term…it might be more accurate, but it would take a substantial amount of study to get any good at it (time I don’t have).  So, I’ve been reading the posts of the blog I mentioned last time…he’s predicting quite a crash.  Frankly, this would not surprise me.  But right now, having your money in any stock in the market is just like gambling, and while many of you think poker is gambling, it’s not (for anyone new reading this, I used to play poker very seriously).  And I don’t gamble.

So…read back through my blog posts…I’ve mentioned many times that the market is us, we are the market.  My cousin, David, just forwarded a blog to me which applies fractals to the stock market, called Elliot Wave theory.  Now, fractals are a mathematical concept that applies to all facets of the universe, including life, and therefore, us.  Briefly, it’s a concept that says that patterns repeat themselves infinitely, big to small, small to big.  You can see it in trees, flowers, stars.   The math behind it has succesfully been applied to things like computer graphics so that mountains/terrain/trees look real when ’flying’ over them while using minimal processing power to produce the image.  I had a friend once who was applying fractal math to a supposely kick-ass compression algorithm (don’t know whatever happened to that).  David’s timing was impecable, as I was anticipating a complete breakdown in the market.  It didn’t happen.  A timing signal that I follow closely (triple digit returns this year) even went to a Buy today (but the creators said staying in cash made sense as well…they didn’t quite trust their own model).  The Elliot Wave theory, as described here, predicts that we are in the last throws of resistance to a complete break down.

Somehow, I believe this.  I can’t pull the trigger on the Buy, because it doesn’t make sense to me for the medium term.  Also, when I first started researching this, I thought technical analysis was complete gobbledygook.  My basic argument was:  which chart do you use, daily, weekly, monthly or yearly?  You can interpret anything out of each of these.   Think about that…coming full circle…you use all of them.  You can find patterns in all…and you have to use all of them.  Exaclty in accordance with fractal patterns.  And this is what I’ve been doing lately, but perhaps without fully understanding the story.   I’ve just ordered two books on the subject and subscribed to a blog.  I’ll keep you posted.

But…key line in this article is “light volume” and “An issue, raised by Toronto money manager Terry Bedford: Apple (APPL), Wynn Resorts (WYNN) and Baidu (BIDU), three of the top momentum plays, were lower in a big rally. That’s not a good sign.” Beware…

Thanks for sending my way David!

Obama is at an all time low…regardless of my own political views, he has finally shown his true colors with this recent deficit reduction package.  Almost all tax hikes, very little in the way of cost cutting.  Even Dems are having a hard time defending it: “Well, he’s finally playing hard ball with the Republicans, not being nice any more.”  Whether it’s a pure political play or not, he put this out there, and now he has to stand behind it.  Felt like a desparate move to me, and one that is not bound to save his presidency.

Why is this relevant to this blog?  Because in my research I’ve noticed that Dems get in office to “save” us, and Republicans get in office when the gov’t has gone too far with regulation.  It’s quite cyclical.  And completely relevant to investing.  The great thing is that our system creates a huge feeback loop, and for all the angst and anger, we trend on a fairly middle of the road path over time.   I do believe the Republicans will win big next year, clear out the gov’t and let us go on with our capitilistic lives – and the stock market should start to go up.  Then the Republicans will go to far…and so on…

Also, I opined in a response to an email my Dad had sent out on a similar topic, thought I’d simply cut and paste it here:

Yep, classic tax and spend liberal.  McCain tried to get this message
across, but the country was in no mood.  I think the overrarching
discontent at the time (beyond the lack of WMD), and today, is the
massive influx of cheap workers available   around the world with the
fall of communism combined with fiber optics making them easily
accessible for any work not requiring a physical presence (not to
mention China’s mfg rise) .  Our politics will thrash for some time as
our wages stagnate and unemployment stays high as we work our way out
of the debt that tried to keep our standard of living up during the
earliest phases of our wages adjusting to this new “presence” of
available cheap labor.

I also read a nice article about how the gap between the rich and poor
is growing here…reason is that the equity holders are taking
advantage of all the cheap labor, while the laborers in the U.S. are
taking the brunt of it.  Not much the government can do against this
tide, although the liberals are trying by attempting to soak the rich
with transfers.  We’ll have to ride it out until the wages increase significantly in
these other countries.  In the mean-time…if you’re suffering, rather than complain about
it…I’d suggest joining it.  Start a company…you can get coders for
$10/hr in China, Pakistan, etc.  It has never, ever been cheaper to
start a company with big potential, especially something online.

We’ll be ok…we’ll figure it out, but it will take a decisive
election in 2012 to truly begin to fix this mess.