With all the negativity and economic disasters being reported it’s quite easy to become despondent and down on the world in general. Most everyone we know with one or two exceptions took a very nasty markets’ beating in later 2008 especially after the downfall of Lehman Brothers last September. Despite all these seemingly once in a life-time messes we need to keep our chins up and focus on positive investing and trades. The beauty of our favorite markets is they are always giving us something in a never ending list of opportunities. We just have to sort through the rubbish and find some diamonds in the rough to earn money.
Back in the 1929-1939 Great Depression those having foresight and positive ideas coupled with gritty determination and old fashioned stick-to-it attitudes, not only were not financially wrecked but made huge sums of money. One example was President Kennedy’s father buying the Merchandise Mart in Chicago. We do not know the purchase price but you can bet it was amazingly cheap as dollars in those days were so very precious. And, we all know of the gold traders and investors great outcome.
The Mart investment was held through many years growing in value by leaps and bounds paying out huge annual rents. It was finally sold just a few years ago with a price pushing $500mm! My old car dealer partner often emphasized to me he made his profits when he bought not when he sold. The art of buying correctly is more than an art it’s almost a religious experience.
Psychologically your mind must have a short, intermediate and longer range vision of an entire trade. You must be convinced in your mind, the trade set-up is correct and that you have an iron clad exit plan with firm pre-trade decisions established regarding stops, profit exits, and of course a way out with a modest loss if it simply does not work as planned. All of these important price points and decisions must be made before entering the trade. In the heat of hot trading, spur-of-the-moment decisions many times are the wrong ones. Make a plan and execute the plan as it was designed.
We are confident and know from economic history certain markets trend certain ways in this scary environment. The worst thing for trading is neutral, bland, channelized markets with little or no volatility. A professional trader’s prayer and daily mantra is “Gimme a Trend; Please!” With no volatility or distinctive trend movement we become spectators just watching and waiting.
What all this market nastiness provides us now is super volatility. While this price jumping offers unusual chances to make big money it also gives us perfectly marvelous opportunities to self-destruct as in crash and burn. Higher volatility brings higher danger as well as opportunity. Risk control is paramount to winning.
We just pulled the new futures margins this morning with a noted update of 2-9-09. You know volatility is hot when silver margins are $8,100 per contract and gold is $5,399. Even the 30-year bond is $4,320 and our favorite Swiss Franc is $4,725. That even faster currency, the Euro, has a margin of $6,345. While these prices will not bother our bigger traders with six and seven figure accounts, we prefer to use options and spreads to earn more bang for the investment-trading buck.
Our point here is that these markets are jumpier than normal giving us expanded opportunities for smart traders having a very guarded attitude toward risk control. We’ve got 5-6 major trades lined-up for 2009-2010 that in our opinion, not only offer chances for faster big trades but more importantly, offer 2-3 year trending trades. If followed and managed carefully they could provide a wealthy retirement.
We call these monster trades a once in a 3-4 years event. And, because of current market upheavals, we are going to get more then one and maybe as many as 2-3 of them. These trades can be found for those with an enlightened understanding of not only today’s markets but those of other recession-depression eras. History repeats but never exactly. And what makes these ideas even tougher to implement is-we’ve never in our life time encountered fiscal tragedy on such a wide-spread, volatile scale.
The Most Important Fact Is Big Government Will Do Exactly The Wrong Thing.
There will be no market relief from these problems until United States housing both new and used has been written-down to fair value prices. How do we know what those prices are and when we can identify the new base-bottom? Consider first that consumers face a triple whammy of falling home sales, falling auto sales and rising joblessness. This is not a formula for improvement within 70% of the U.S. national economy.
The realization that values are much lower must be acknowledged by home sellers. Next, some reasonable number of homes must be sold and closed at lower prices to establish a new market floor. This will vary by markets but closed sales should be at least at an annual rate of 25-30% of former annual sales numbers.
Next, business, industry, consumers and government are all operating under the false theory prices will regain their old recent highs (2006) if enough stimulus and giveaway cash has been thrown at these many problems. Any and all monies tossed into that messy mix are simply throwing money down a rat hole in massive waste. This is the crux of the bailout program.
This government stimulation cannot have any effect as the money is landing with the framework of old budgets and paradigms. These economic models are saying 2 and 2 is 7 which is preposterous. Prices must drop substantially.
Used housing prices in stronger regions will be cut in half as a minimum. Prospective sellers cannot imagine taking such a haircut and prefer to wait it out hoping for higher prices. We say they will be waiting 10-20 years with that kind of attitude. To make a sale a house must be priced to what the market will bear. And, today, it won’t bear very much as new buyers keep waiting for prices to drop even further. In this atmosphere, the spiral continues and the bottom remains elusive.
Coincident with actual bottomed prices, most or all of the bad toxic mortgages, along with business and commercial debt must be written down to realistic levels or, in fact written-off totally. We are no where near being close to this final conclusion. In our view, the worst of the worst hits in spring and fall of 2009 with a secondary nasty cyclic repeat in 2010. After 2010, should the stock market regain higher prices with unrealistic earnings or, a false valuation premise, we will all get nailed again just like in 1937 when stocks fell nearly -45% after a 1934-1935 dead cat bounce.
It goes against the grain of psychology and general common sense to deliberately take a 50-62% haircut on a house that at one time might have been worth double or even more. Sorry folks; this is the reality of it all. Those not needing to sell a home should hold on. Those needing to sell should sell offering some seller financing at low prices. Those wanting to buy should in reality wait longer but if they insist on buying should buy using seller financing with a tiny cash down payment.
All home sellers should be very wary of standing mortgages and the fine print writing within them. Some or, all of these mortgages are at risk of being called in even if not in any default or arrearage. Banks have the prerogative to call any loan any time they see fit. Some cases could end up in court but the danger is real. We think banks will call even some good loans in desperation to raise their capital base and stay within bank regulation guidelines. Otherwise they might be shut down.
Some call it restructuring. Some call it selling at crazy discounts. Some call it a total default of a debt whether it’s a consumer or, of commercial variety. A good analyst friend suggests this process takes 4-6 years. Based upon history we tend to agree although depending upon the amount of government bailouts and interference, it might last a lot longer. Sadly, the usual end to this mess is a war as in 1941.
FDR’s New Deal was in actuality a Raw Deal. Tossing cash while it appeared to mitigate some 1930’s suffering did not resolve the massive underlying problems of miss-matched asset prices. Treasury Secretary Morganthau in 1939 said the New Deal was a failure as 1939 jobless amounted to more than 20%. At its worst, the 1930’s unemployment was reported to be 25%. Today, government is making the same stupid mistakes again but on a much more grandiose scale.
In 1920-1921, the U.S. suffered a hard and fast depression. It started and ended in 18 months as the government just left things alone. Free markets solved the problems and a following ten year expansion-boom transpired. Capitalism works when left to its own devices. Meddling makes a big mess.
We think for this go-around, national unemployment, actual but never acknowledged, hits 30-35%. In rust belt states like Michigan, demise of the Big Three Auto companies just about guarantees 35-40% jobless. In Michigan today the number is an unacknowledged 17-19% unemployed. This is only a warm-up. Hundreds of thousands more are going to lose their jobs. The social unrest could be quite scary as the U.S social-welfare safety net is full of holes and totally unprepared for the coming onslaught of millions unemployed and hungry people.
So What Do We Do As Traders?
We carefully pick our cyclic spots based upon some forecasting and pricing. We decide to trade in only 1-3 markets and devise a trading plan to cope with the possibilities. This is not easy as several decisions must be correct for these trades to work properly. Share traders should be very picky and go with only a handful of the best of the best. Further, they will have to enter-exit at a minimum of twice per year and perhaps even more often depending upon what Mr. Market gives us.
During the first five months of 2008 we nailed 18 winners in a row in futures and commodities riding a definite trend. In hind sight, being up personally +220%, I should have recommended a total markets exit for the rest of the year in June, 2008. We did not and gave back the gains but remain in the green personally with original capital intact and are up a reasonable percentage. Further we hold some nice paid for gold spreads for December, 2009.
Our objective now is to regain the 220% and potentially more. Can we do it? I think we have a very good chance as our favorite markets are quickly healing and pointing toward more rallies and higher prices. During this round we intend to take profits faster while remaining in those markets where we feel comfortable striving for better trades and better returns.
Do not give up now-even if your capital is badly depleted. Start small and work your way back as the best of the best trades might surprise on the upside.
In Trader Tracks, we provide weekly guidance and extra e-mail alerts to report our best new trades and offer suggestions for trade management. Visit our website at webeatthestreet.com for more information on our spectacular futures and commodities trading record.
Whatever you do, make a concerted effort to stay with our trend and hang onto your core holdings of favorite shares, cash, and coins. Physical gold should never be sold or, traded but rather accumulated steadily on a monthly savings plan.
Recent news says you cannot find any coins or, others. We see delays and back-orders but some dealers have goods in hand right now. Go shopping. Should you have difficulty buying physical metals, we suggest placing an order and being patient. Big traders are always ready to buy the dips and normally never sell their gold and silver. You would be amazed how quickly your physical gold and silver will accumulate using this strategy.
Editor Trader Tracks Newsletter
& The Rog Blog at webeatthestreet.com
Roger Wiegand is Editor of Trader Tracks Newsletter for gold, silver and energy traders. Roger provides recommendations for short and longer term traditional stock shares, futures and commodities trading with specifics for individual trades. See webeatthestreet.com for more information
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