The Market

I must mention that my virtual trading account on http://www.updown.com/portfolio/ is doing terrible! I missed this bounce something terrible. It has been a big bounce too. Part of the reason I have not covered my shorts and changed my positions is because I still believe this is a bear market rally. I would have loved to have caught it, but I missed it.

Now, one trading mistake I have made in the past was not to trust myself enough. There were cases where if I would have stuck with my original short, even though I was being horribly squeezed, I would have come out way, way ahead. Perhaps I would have even won a few contests. However, I just did not have the risk appetite for it. This time, I am not going to make the same mistake. (could be a different one though)

You see, nothing fundamental has changed. I originally thought the market was way overvalued, at about 14,000 on the DOW because I thought our economy was being driven not so much by innovation, but by asset depletion. I was correct. Most of the "growth" in GDP over the last 15 years or so came from a massive increase in consumer spending. Most of the wealth that was used for extra consumption was extracted from assets (primarily residential housing) but also business assets. This made our "growth" look much higher that it actually was. What was really happening on a massive scale, behind the numbers, was asset depletion across the entire economy. This was clearly unsustainable. I have discussed this in more detail in previous posts.

What has changed? Well, the housing bubble has burst. Consumer debt levels, however, are still at record levels. The government has essentially nationalized the major car companies and banks. In doing this, they have nearly bankrupted themselves. If it were not for their power to extract wealth from producers and innovators through force, they would be insolvent.

What else has changed? Have incomes risen? No...they have fallen.

This "recovery" relies on consumers to take on new debt. The bounce in housing is primarily
because of the $8000 tax credit. (some of it is also due to falling prices) The government is desperate to start a new bubble. Unfortunately, in their attempts to revive the patient they are doing long term harm. It's like taking unsafe weight loss drugs instead of using exercise and proper diet to lose weight. You may look great temporarily, but your likely to drop dead of a heart attack. Are you really healthy? What happens when you stop taking the pills? Is you weight loss sustainable? It is not.

That is the position our economy is in today. It is not healthy. I am sure that underneath it all there is a strong resilient economy at the core. However, it is much smaller than the bubble economy were living in. Hopefully some bright young PhD at Harvard or MIT is looking in to that.

So.... I am still short the market (through SDS). I am short MasterCard. I am short Auto Zone. I am short Lowe's. Perhaps I will lose all my fake money. But I am sticking by these trades. I am also long a company called NXG. (Canadian gold and copper miner) This is with a very small amount of real money. (These are not recommendations, trade at your own risk.)

I know this is a very unpopular opinion, but I believe the market will not only retest its lows, but break through them by another 15-20%.

One trader's perspective: