Thursday, August 16, 2007

A Tale of a Completely Irrational Market

Hang on because I have alot of thoughts.


Graph of the day:

















I think this describes everything today. Look closely. This is E*Trade. This is a day graph!!! Not a graph over a year, 3 months, or even a month. A DAY!! At one point it was down 28% only to climb all the way back up to be ahead 2% on the day to fall back right at the close and finish down 2.58%. Are you kidding me? This is not a penny stock. This is a $6 Billion dollar company!!

There are no words to accurately describe how irrational the market was today. Pfizer which has a 5% dividend yield and a 9% free cash flow yield and the stock is down .5%. Financials shoot through the roof. Housing stocks do as well. Brookfield homes up 13% (no news that I know of and a candidate for bankruptcy in my opinion). At the same time powerhouse Microsoft was down 1%. The out of whack nature of this was even worse earlier in the day. The Russell 1000, DJIA, NASDAQ were all down over 1%. The Russell 2000 ( a huge index) was up .5%. I mean this stuff makes good fiction.

This looks almost exactly like last Friday. Same wackiness. One of my worst days before having three incredible days Monday, Tuesday, and Wednesday. It is when nothing makes sense and what is up and what is down does not make sense. Last Friday Dow was down 200 plus and finished down like 30. Same thing today except more extreme. The reason I truly believe is that quant and long/short funds are collapsing left and right. Margin calls are occurring everywhere. I have not talked to any friend at any hedge fund who is not getting margin calls. (Do have one friend who works for a hedge fund that does not use margin and obviously he is not getting any) As many of you know I for the most part do not use margin. May dip into like a percentage or two to finish out a position back when I was fully invested. (boy that was awhile ago) Where I am forced to use margin is in commodities. (Also as many of you know I am very big bull over the next few years on soft commodities) Anyway I was talking to my broker about various margin requirements and he was saying well I really do not know what the margin requirement will be. I was like what do you mean. He said well it is changing daily and sometimes hourly. If that does not tell you what these hedge funds are going through, nothing will. They are being to force to sell their biggest liquid names, Microsoft and Pfizer, and cover whatever they can. This is why you get complete wackiness.

This is really turning into the ultimate gut check. It is testing everyone's pain threshold to the ultimate maximum whether your long or short or market neutral (you would think that is what I am if you looked at my portfolio, definitely not the way it reacts on a daily basis). I am like 50% cash and my portfolio is moving more on a percentage basis day in and day out by like three fold plus than when I was 100% invested. One day you are feeling wonderful and the next day you have a gut check as everything moves against you and the market tests your mental toughness. You have got to have a fundamental view on each investment or you are going to get eaten up.

When I woke up this morning and saw the yen sky rocket I knew we were in for a tough day. Early on everything was down. I do mean everything. There is no news on the corn and soybean front. Soybeans limited down at one point. Corn and soybeans are barely tied to the economy but everyone is fleeing risk.

I think there is a very good chance we will have a decent bounce here. 3 to 5% which will tests the short resolve. I still think we have more pain ahead. I do not see whatsoever how with credit essentially evaporating nation wide how that does not severely damage the housing market causing a further chain reaction. To me the verdict has already been laid down that a recession is inevitable. To be able to stick to that view with my portfolio is going to be a massive test of will power. Of course if "normal" things start happening, like strong undervalued companies actually go up, where I am a long a few names, the test would be alot less severe. Even if I am right it probably falls under the fooled by randomness category. Someone equally in tune with the market and what is happening could come to the opposite conclusion. Whoever is right (him or me) will feel good about oneself but will him/me be truly smart or lucky?

There was one rational thing that happened today!!! Berkshire was up today 2.3%. Why did this escape irrationality. I think because hardly anyone is short it. This is the stock to be in. Not only is it already undervalued, has a balance sheet of a Roman fortress, but this could be a huge investing opportunity for Buffett.

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