Game Plan

Well the world has changed dramatically since S&P issued the all clear on Thursday. No surprise they were the last ones to know. The crazy thing is not their total incompetentcy but how much power the ratings agencies have. One little reported nugget in this whole thing was that S&P cut Bear Stearns on Friday to a level above junk and this cut pushed Bear into a bankruptcy position for Monday. If this cut would not have happened apparently they would have had more time to broker a deal. A couple of things should jump off the page. One is that the rating agencies only cut them to a notch above junk! Once again everyone knows this is retarded. You have a Fed bail out of your company and the debt is still supposed to be investment grade?? Yet even this cut pushed Bear over the edge in 24 hrs. That is huge power!! Everyone is picking up on this and Congress will be moving before long. I do not think the rating agencies business model will be the same 2 years from now. I have been short Moodys since last summer and will probably add to the position before long.

So what do you do now? Bear gets bought out for $2.00, Fed does all kinds of things, the Asian markets are down 3% plus, the dollar is plunging against every other currency, and commodities are soaring with gold up above $1025. It has been one of those weekends where I have been on the road a lot and so thinking a lot. Before I knew all this I came to the conclusion that the probabilities scenarios are a big soup bowl and almost undeterminable. The chance for a depression has to be moving up to the 25% level, at the same time severe inflation possibilities is picking up, while we are in extreme oversold territory with VIX hitting highs not seen since January signaling fear is back in the market and the put call ratio is at all time highs. The variant roads the U.S. economy could take over the next 12 months are many making valuations very very difficult. Over the next few days, weeks, months, and maybe even years is inherently unpredictable. So what do you do? We are teetering on the unthinkable. We could fall one way or the other and at least in my opinion, the probabilities are either impossible to figure out or to close to make any investment decision on your estimate. The main thing of course is to be rational taking advantage of others irrationality. You have got to create some kind of game plan before the craziness of tomorrow and this week. So for example.

If the market is down more than say 500 points (just making up a level, whatever sounds good to you) you start smartly buying.
If the market is between -500 and -100, you do nothing.
If the market is down less than 100 or up you start smartly selling. In general you probably sell any significant rally.

You focus on names you know and do not try to be some kind of hero. If the market is down by more than 500 points hopefully you have cash. You can start buying smartly and that may mean only buying leaps conserving cash in case this is the beginning of the end as we head to a depression. That way you may lose 100% of your leap but only put 20% of your cash to work where as you would have put 80% of it to work. You lose less if a depression comes; you win more if things return to normal. These moments in history create huge shifts of wealth. Millionaires become penniless while at the same time it creates the opportunities for people to make millions. Take advantage of the opportunity to capture wealth!

Here is a question for you? The Great Depression put the last nail in the coffin moving the center of the financial world from London to New York City. Does this crisis create an equivalent shift to Tokyo or Hong Kong or Dubai? Banks in these countries are getting slaughtered. Someone wins huge and should not be going down. Who is it? Two big Australian investment banks Macquarie Group and Babcock & Brown are down 9% each right now, opportunity?

By the way, the low for the Dollar against the Yen in the mid 90s was in the low 80s.

Also, right now the futures point to a 250 point open lower in the Dow. That could change dramatically up or down by tomorrow morning.