Trade Recommendations

So I thought it might be interesting for readers if I update this blog with trade recommendations in addition to my thoughts on the markets. However, when it comes to trades, I am reluctant to make any recommendations that I am not sufficiently confident in, or that I cannot carefully elucidate the rationale behind. I will make a concerted effort in the next couple of weeks to put together some solid research, but this could take a while as I don't want to be sloppy or shallow. In the meanwhile, I will continue to post my thoughts on current events.

For the interim, here are my general long term thoughts on markets based on fundamentals.

1. Short the DOW, S&P, Nasdaq.
   
   Although the US has experienced a cyclical bull in the last few years, it seems abundantly clear that it is still firmly in a secular bear that will end in 2016 or so. Further, as any Austrian will tell you, that the Fed kept interest rates at 1% for such a long time only served to lessen the cathartic effect the 2001 recession should have had. For this and other reasons (eg), I have maintained that the recent bull market was based on weak fundamentals and would likely turn after the housing market turned. Gerard Jackson is one of the few Austrians who believes that the US has a little while further to go as manufacturing has not been showing significant strains. I agree with Mr Jackson in theory. What is curious is that the US has been bleeding high paying manufacturing jobs (3.5 million this decade) and replacing them with lower paying service jobs. A weak dollar may serve to reverse that, but only if Congress refrains from meddling.
   
   Ever since the housing bubble decisively burst and Mish issued a top call last summer, I have been aggressively short the market as a whole using ultra short ETF's SDS, MZM, QID, and DXD. Long term I expect the markets to continue to do badly, even if last summer was not the top. Unfortunately, since the Fed can inflate it's way out of price decreases, we should be careful to recognize a stagflationary environment early, exit one-directional bets, and replace them with relative value trades.
   
   I have to admit that today I have simply no idea what will happen. The economy appears on a precipice, but the Fed may yet rescue it at the expense of the dollar. I have trailing stops on all my positions.
   
   
2. Long Gold, Silver.
   
   For reasons described elsewhere, I am extremely bullish on precious metals. I have been long gold since I started investing in 2005. Long term I continue to be bullish on gold, but short term I feel it is overextended. In addition, since the macro environment is currently so murky (will we have deflation or stagflation?), I cannot recommend a one-directional bet just yet. I have taken profits in my gold and silver positions and remain on the sidelines for now.
   
   
3. Short Muni's, commercial real estate, credit card debt, auto-loans and various structured products.
   
   Markets will worsen before they recover. I think we should be careful to understand that this is a credit crisis marked by changing attitudes and not a subprime issue. Subprime was the weakest sector and expectedly was the first to get hit. All those who said the crisis will be contained have been proven wrong, and will be proven wrong again in the future.
   
   
4. Long emerging markets.
   
   While the US and Europe may be in secular bears, the various emerging markets should pose great buying opportunities once they de-couple. In the short term this means pain as I expect things to worsen. In the long term these will be once in a lifetime buying opportunities. It's going to depend on how the coming recession reorganizes the production structures in the various economies. I think India will be least hit as the economy is largely domestic driven. Russia too will not be badly hit, but China, on the other hand, will have many mal-investments to liquidate as its economy is so largely export driven. It could be in for some serious pain.
   

Capital Preservation

Because of the uncertainty in markets, I think playing macro trends currently can be very dangerous. If you are a long term investor, I would recommend staying on the sidelines for the next few weeks. The most important concern currently should be with capital preservation. Making a one-directional bet today has little upside and potentially large downside. Also, many opportunities will present themselves when the dust settles. As such, capital preservation is the name of the game.

That having been said, there are certain trades that I would feel comfortable putting on today to profit from the uncertainty in markets. For example, the VIX recently put in a triple top. Historically, any breakout above the triple top has been significant. Also, certain options strategies, such as strangles, or some sort of reverse butterfly can be highly profitable. These are the lines along which I am currently thinking and will post a more detailed analysis shortly.