Thoughts

A 400 point rally. Second one in two weeks. After yesterday and hearing all the talking heads, really no surprise here. So my thoughts going forward. First, Wall St. are idiots. There is no reason we should be rallying but I thought last week listening to what the talking heads said that we were headed for a bounce and that got postponed by Bear and now that is past there is even more evidence of a good bounce. For the most part I ignore technical indicators but we are playing a probability game and when things become so extreme, when they get so out of whack, if you own puts to protect a name it can make sense to take off that protection. The probabilities get so far in your favor. All of 2006 I did not look at the VIX or put call ratio. They never go so extreme to scream so loudly that you could add and take off protection or short exposure.

The game plan seemed to work pretty well for me. I said if the market opened down between -100 and -500 to do nothing. That is what happened and besides covering about 40% of my Lehman short (wish now I would have covered it all) because it opened down 40% I did nothing. I watched. I also said probably sell any major rallies but that is where the art comes in. As the day progressed you could tell by the tape, the breadth, the overall confidence returning to the system that it was not a good time to sell and to start buying or pulling back the protection. Like I said this is where the art of investing comes in. I wish things were more normal but you are getting moves in massive companies that you don't see in six months or a year much less a week. They are more like technology penny stocks than blue chip companies. If you are short Lehman, boom in two days you are up 60% (Lehman is down). You got to start covering. If you bought Lehman after the down move in 24 hrs you had an 80% move up. You have to sell that 24 hours later. Does that make you a trader? Not really because if you thought it was a fifty cent dollar you received almost full valuation in 24 hours. I could name name after name like that (less extreme). Guys like me struggle with this. We buy something with the expectation that we will be holding it for a year, two years, five years and feel amost dirty if we sell it two days later. Well if you buy something and it moves up 20% two days later, you do not have to sell all out but it makes sense to take profits. These are just massive moves.

Fundamentally I do not think anything has really changed. The Fed is finally living up to its reputation in dropping loads of cash from helicopters. That is restoring enough confidence where money is starting to return to the market. That Pavlovian response is good for a decent rally I think but in my opinion it is a wrong response. Commercial real estate still has not started to blow up and corporate defaults also have not started. The mortgage mess is still in mid innings at the very best. Ambac and MBIA (remember them?) are going to have serious problems which will create the second round of saga with these guys. The Fed is addressing the liquidity issues and the market is focusing on that, the solvency issues are not done with however. Time will bring them back to the forefront.

In these types of markets the artistic skills of adding protection and taking off protection and shorting and taking off shorts are invaluable. The main thing is if you make a wrong call you are conservative enough where it does not cripple you.