What the.....

Okay now after the video below, time to write some thoughts.

What in the world is the FED doing? Do they even really know?

I have been whipsawed like everybody. I am sure you are asking why? Aren't you a long term "value" investor where the short term gyrations do not matter. The answer is yes but. The but being hugely centered on our system. It is the same type of question as what is money? What really is it? Well it is nothing unless someone else finds it valuable which is nothing unless that person has trust in whoever is backing it. In the late 1800s the trust was in individual people such as Pierport Morgan and the Rothchilds. Now the system has morphed where the trust is in institutions such as the FED and mortgage insurance and the system they manipulate. When the system breaks down, when the trust dissipates you have dominoes that can fall hitting everything else. So I had spent a decent amount of time researching shorts and longs depending on what the FED did. Isn't that irrational? Shouldn't there be an underlying intrinsic value. Once again yes but. Intrinsic value and probability scenarios are very dependent on rock hard foundation of the system. If the system breaks down value falls for most names. On shorts as I have written before I don't short on valuation but on themes. So a theme I have played for over a year has been financials working up the system. First shorting subprime, then alt A names, then prime names, then mortgage insures, and now home equity lines of credit. If the FED would have aggressively cut rates say 50 bips and cut the discount rate by 75 bips it may have been enough of a shot (at least in the short term like in August) to restore faith that the system was getting the medicine it needed. As I said yesterday I was shocked at what the FED did not because I thought it was the wrong thing to do (my fear as I have stated many times is inflation, this system needs to break down in an orderly fashion even if it casuses a recession) but because I thought they would cave to market pressure. The reaction was brutal and immediate with the market tanking. Investors and traders immediately realized this is not what the system needed and as all the excess gets unwound, down goes the stocks. I, like probably most, increased the positioning of my portfolio for a continued deterioration of the system. My longs that I really liked for the long term I ignored but started ratcheting up the short exposure for my theme based picks.

Then the FED did what it did today. It caught everyone off guard including me. It caused mass confusion. Initially it looked like all the posturing and the timing could restore faith in the system. The positives were that this was a coordinated effort that had been in the works for awhile. The FED was paying attention. So I ended up buying some of those longs that I had done work on. That was short lived. Instead, as Cramer correctly pointed out, (I can't believe I am actually referencing him positively in a post) it helped Exxon (up 2%) and hurt exactly what the FED was supposedly trying to help, financials. Why? Primarily I think it goes back to what I referred to above. The FED is speaking out of both sides of its mouth, appears confused and somewhat panicked. That hardly leads to confidence to the system and I think it actually deteriorates confidence in the system. It is in stark contrast to how Morgan stood in the panic of 1907. First the longs got burned after the FED decision yesterday then the shorts get burned after the FED news release today. In the world of finance that adds huge uncertainty. The market of course hates uncertainty which as a result increases the overall discount rate. The risk premium people will charge increases. This hardly helps the FED's overall goal in increasing liquidity and unclogging the system. For me personally it caused me (it didn't cause me, I caused me) to trade horribly as I was forced to position my portfolio and then reposition it. Finally I just gave up and tried to make it neutral compared to what I typically run when things are more normal. Either way it cost me dearly on the entry point. There are many names that I believe are very undervalued. That is in the framework of the system however and unlike 2002 the system is in danger of collapsing. In 2002 you could buy a security undervalued and the intrinsic value would most likely be eventually reached. Unfortunately looking at deeply discounted securities is more difficult because the probability of the system breaking down (black swan type breakdown) must be given a much higher probability. You are dealing with financials and debt which is what our economy, progress, and the world revolves around. A telecom bust definitely touches other areas but a banking bust touches every area.

With all this said I still reiterate my call for a recession which I have been calling for since August. History is firmly on the side of one. I still think defense is the best strategy. Also I would like to point out hotel stocks unlike retailers are not pricing in a recession. Wyndham already showed they were feeling the pain a few days ago. I was looking at it and was to slow. Others I believe will follow.