Wednesday, January 02, 2008


HAPPY NEW YEAR ! Prosit Neujahr ! Bonne Annee ! Kenourios Chronos ! Feliz Ano ~Nuevo ! S Novim Godom ! Antum salimoun ! Xin Nian Kuai Le ! Naye Varsha Ki Shubhkamanyen !

After an extended break I am ready for 2008 . Looking ahead some of the key themes that I
see are as follows
  • Strengthening of the Yen and hence a weakening of the global stock market via unwinding of the Carry Trade ( borrowing Japanese Yen at low rates to speculate in high yielding assets ). The Yen has been making lower highs and lower lows since July.
  • Continuation of the banking and mortgage crisis. Subprime is so 2007. 2008 will introduce as to HELOCs ( Home Equity Lines of Credit) , Pay Option ARMs and other fancy mortgage products that are going to be defaulted upon. Watch for an increasing amount of defaults in jumbo loans ( $417,000 +) .
  • Credit card and Auto Loan defaults will go through the roof. People making $60,000/yr cannot afford $100,000 cars.
  • The bottomless real estate market. Things will not get better in 2008. Infact they will get worse. A large rise in foreclosures in the million dollar plus range. Commercial real estate will suffer too. Watch the Los Angeles and Manhattan real estate markets take big hits.
  • Recession. First there was absolute denial , then there was acceptance of perhaps slower growth , than they agreed upon a mild mainly housing based recession and soon they will accept the truth and that is an all out recession. Things will get bad. Very bad.

I may add more to the above list as the day progresses. From the list it may appear that I am overly pessimistic. Truth be told I would love to sound optimistic and act like everything is great like this cheerleader Ben Stein . Unlike Ben however, I live in the real world and see things on a daily basis. I go to regular malls, eat at regular restaurants, talk to regular people and get a sense in general that things are not looking good. Its not too difficult to do the math. The 2003-2007 economic boom was built on cheap easy credit. While credit is not too expensive, it is alot harder to come by.

Less credit = lower spending = economic slowdown/recession.

One does not need to be Einstein to figure this out. People tapped equity from their rising home values to spend. Home prices are heading south. People can't use their homes as a bank any more. Spending is going to have to be done the old fashion way - credit cards or perhaps the old old fashion way - through saving. Americans are maxing out their credit cards at an alarming rate and they dont' have Home Equity Lines to bail them out like they did a few years back. This is cause for concern.

So how do we trade all this ? For now I feel the best way to trade this market is to stay on the short side. There will be sharp rallies as always but as we have been seeing since September onwards, the market has been making lower highs and eventually things will break down to the point where those August 2007 lows will be taken out. I believe the Dow will eventually trade as low as the February 2007 lows and perhaps even lower if things get really bad.

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