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Let’s Get Ready for 2011

December 13, 2010

We have seen a great bull and a mild bear  market (which actually didn’t go as wild as it could have been) thanks to Greed and Fear of the Wall Street and those who packaged junk and guess what Wall Street is about to witness record revenue in 2009-10-recovery, thanks to trillions in the form of Government bailout(s). With record revenues also come record bonuses which we’ll get to know only early next year. But guess what, the little guy who provided money to bailout banks is still licking his wounds. He/she doesn’t even realize what the heck has happened and despite spending humongous amounts of money he is still jobless. And the sad part is, that he/she will probably continue to fall victim to the same game, over and again. Click here to read an article from ZeroHedge that points to extreme optimism prevailing in the markets.

Do you really want to understand what’s going on. Here is a simple write-up “Fed’s QE Ponzi Scheme begins to backfire” by Gary Dorsch of Global Money Trends magazine

In a taped interview with CBS’ “60 Minutes” that aired on December 5th, Federal Reserve chief Ben “Bubbles” Bernanke tried to brainwash the American public, into believing that “Quantitative Easing” (QE), is absolutely necessary in order to prevent further losses of jobs, and tried to assure his listeners that he has the skills to keep inflation under control. The US-jobless rate would have risen far higher, “something like it was in the Depression, at 25%,” — had the Fed not provided tens of trillions in loans to Wall Street banks and other financial companies, he said.

Two-years ago, the Wall Street Oligarchs played the central role in the greatest financial scandal in the history of the world, – one which wiped out tens of trillions of dollars in wealth, nearly bankrupted giant corporations and entire countries, and plunged the world into the deepest slide in global trade since the Great Depression. Huge profits were made in sub-prime mortgages, based on a Ponzi scheme of exotic financial derivatives and sliced packages. When it came crashing down, the public treasury was looted to cover the financial aristocracy’s losses.

Since then, the Fed has carried out QE-1 between March 2009 and March 2010, in which it bought $1.45-trillion in mortgage-backed securities and $300-billion in Treasuries. Together with pegging interest rates at zero-percent, weakening the US-dollar, and flooding the stock markets with cheap credit, – the Fed enabled US banks and S&P-500 companies to record bumper profits, even as they slashed jobs and capital spending, and suffered revenue declines.

With QE-1, the Fed channeled interest free money into the coffers of the Wall Street Oligarchs, which in turn, was used to buy higher yielding Treasury bonds. In a single stroke, the Fed monetized the US-government’s debt, and at the same time, bankers earned double or triple the interest rate at which it was borrowed. They pocketed billions under the scheme. Wall Street banks also bought high-grade corporate and junk bonds, and emerging market bonds, to fatten their profit margins. At the end of the day, QE-1 was utilized to recoup the gambling losses of the financial aristocracy, and created fertile conditions for driving-up equity markets.

Here is what Mr Richard Russell, a famous Dow Theorist think of this market-

Let’s be honest, this is a damnably difficult market. My PTI has been wobbling up and down ever since February. Nothing the markets are doing seem to make sense. C’mon, all I ask for is some clear and obvious trends, and none of the markets seem willing to give me definitive trends.

So if you’re losing money in the markets (and almost everyone is) don’t get depressed or discouraged. Even the pros are getting beat up by these markets. The winners are those individuals who are losing the least.

For my own interest, I often follow the selections of well-known advisories. I have six lists that I follow, and all six are now under water. Pity their poor subscribers.

But if you think you can still win this market just because you think you are smarter than those banks, read this wonderful article from NY Times “A Secretive Banking Elite Rules Trading in Derivatives” ; These are indeed interesting times. Let me add little more to the bearish  tones, Read “warning”, yes warning from John Hussman of “Hussman Funds.

Just like an advertiser/marketer, presenting data is something that is biased by the author’s perspective. One may choose all the data that points to bearish tone, or data that points to Bullish tone. Whichever case I want my readers to read, I can present data to support that hypothesis.  So keep in mind that just as I can collect data for bearishness, I can collect for Bullishness too.

But I am NOT Bullish and hence I presented above data.

Sometime back, I argued Uncle Ben’s logics for QE2; and mentioned that “Permanent Wealth effect via Stock market” logic was flawed. Since then Yields (long term rates) had been going up and up (instead of going down that Mr Bernanke was expecting). So much for the $100 billions that has been spent in the first round of QE2.

So, bottom-line, where does this all leave a retail small investor? What to make out of all this?

Here are my three cents. Money is made two ways-

  1. Capital Appreciation
  2. Cash Flow

To win in the game #1 i.e. Capital appreciation, one needs to have an edge. That edges comes from knowing “How to Value”, then “Finding the Value” and finally “Harvesting the Value”. It takes time and guts. I know of many “long term value investors” who lost their shirts by “buying and holding” thinking that they are buying value. And let’s face the truth, value is not found easily. People of my age haven’t really seen the value in stock markets i.e. when S&P is trading at >6-7% dividend yield and smoothened P/E in single digits. For retail investor, knowledge horizon is limited to the “published” information, and finally he hardly has any influence to change board’s decision to unearth value.

Sometimes, you may win in #1 by technical/ momentum investing. I’ll leave this to discuss some other day. You may also win when you are investing in a cycle or happen to be in the right place due to factors that you may not replicate i.e. rising tide lifting all the boats.

Game#2 i.e. Cash Flow Investing involves a different mind set. It is about collecting monthly checks, somewhat similar to monthly salary. You buy a house, rent it and collect the income. It is not a get rich quick scheme. It requires operating discipline and planning. When reviewed over a long horizon (10-20 years) there are many more examples of retail investors succeeding this way vs. those winning via “Capital appreciation”. And that’s where Option Trading comes in.

Options provide tools and mechanism to retail investor to win the investment game as long as “Greed” and “Fear” is checked and operating discipline is followed. You can design n number of monthly income trading strategies depending upon your knowledge and capital level. Albeit, it has to be a business and be treated like a business. Just like in any business you’ll have Standard Operating Procedure (SOP) or CBAs, you need to have your SOPs/CBAs for your little “Option Trading Business”. Will you win all the months, no! No one can! But do you have more chances of succeeding via Option Trading as opposed to direct equity trading, probably yes.

So change you game for 2011. Don’t fall victim to the “get-rich-quick schemes”. Set your trading vision. Design your objectives and set realistic goals. Measure those regularly. Learn continuously, refine and then re-set your objectives. If you need help, do drop me an e-mail and I shall help you.

The New normal is settling-in and you need to prepare accordingly. THERE ARE NO SHORT CUTS.

Have a wonderful “preparation” for the 2011, don’t spend just because you are “consumer”; every single cent you spend should add value to your life and that’s what is “new normal”,

OPNewsletter Dec 2010 portfolio is up >10%, if you would like to sign-up, pls click here to sign-up for the wait list as subscription is via invitation only.

Profitable Trading, OP

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