Goodbye 2011 - A Wild & Crazy Year

Oh, and a nicely profitable year as well !

Here is what I will remember about 2011

S$P 500 closes at 1257.60 --- 0.0% flat (actually down by 0.04 points, or 0.0032%, while trading in a wild & wide range of 1074 - 1370)

My trading accounts did substantially better ... if I posted the number, you probably would not believe me (hint: think John Paulson in reverse ...).

Despite my good fortune in the markets, I still made too many mistakes, some very costly.

This needs to improve.

Important events of 2011 included:

- Osama bin Laden killed by US Special Forces ... putting in a market top.

- QE 2 ending, taking away the crack cocaine that drove the market relentlessly higher since Sept. 2010 thru the bin Laden top & until it ended in June 2011.

- The ongoing Democrat/Republican/Obama skirmishes regarding out of control government spending & debt, culminating in the debt ceiling summer drama, which led to ...

- S&P downgrading the United States Credit rating in August, which precipitated ...

- A massive stock market correction in August & September and market volatility through year end, which was exacerbated by ...

- Europe ... which, as hard as it is to believe, is actually worse off than we are, with all sorts of sovereign and bank problems, a troubled currency union, a recession, austerity, etc. etc.

Which takes us to 2012, a presidential election year (and also the year that the Mayan calendar apparently ends, along with the world according to some).

What will be in 2012 ? Nobody knows, but it is likely that the European drama will continue to play out, there will be more sovereign debt rating excitement and market volatility.

In the U.S., the political gridlock will only intensify as the election cycle kicks in to high gear.

We should also keep an eye on the BRIC countries, as India is slowing, China is probably slowing, Brazil too. And Russia is a mess. Finally, will the US stabilize and grow, or will we slip back into recession.

My goal is to remain extremely flexible regarding my overall approach to markets and market conditions, and continue to try to be well hedged, while focusing on short and medium term profit opportunities.

If you care to learn more about my 2011 trading performance and the strategies that helped achieve them, feel free to get in touch.

Finally, here is what I will remember most about 2011:

My Green Bay Packers winning Super Bowl XLV !

Followed by a 14-1 start heading into 2012, the final week and the playoffs, and hopefully back-to-back titles !

Happy New Year & Good Luck in 2012.

A Broken System ?

Although I trade the markets every day, I can not escape the feeling that our financial system is fundamentally damaged, if not broken, due to an accumulation of factors.

Simply put, our markets, despite Dow 12,000 or S&P 1,235 are very unhealthy.

The markets are sick, just like our political system is. The President is MIA on a golf course somewhere or campaigning (maybe its better with him out of the way) and Congress only makes things worse by whatever it is that they do (think Dodd Frank) and that they don't do (think MF Global and Congressional Insider Trading).

Rather than go chapter & verse, here are a few well thought out summaries:

Peter L. Brandt on MF Global & Congress:

What Really Happened @ MF Global: http://peterlbrandt.com/what-really-happened-at-mf-global/

MF Global: The Contagion is Knocking at your Door: http://peterlbrandt.com/mf-global-–-the-contagion-is-at-your-door-knocking/

How You Can Get Involved to Stop Insider Trading by Congress

http://peterlbrandt.com/how-you-can-get-involved-to-stop-insider-trading-abuses-by-congress/

ETF Digest: Slow Motion Crash Developing http://www.etfdigest.com/index.php

Bill Fleckenstein comments on MF Global: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/12/12_Fleckenstein_-_His_Concerns_About_MF_Global%2C_Gold_%26_More.html

FLECK: “Corzine appears to have been able to have lobbied the regulators to get away with what appears to be some sort of an in house repo. That looks like it might have been what happened to customer funds. I should say we don’t really know what they did exactly and we don’t know how much has been lost.

But I think they have certainly undermined confidence as it pertains to people feeling like brokerage firms are creditworthy. Now there is all of this angst over hypothecation, rehypothecation. I don’t know that it will change the credibility of the stock market, that’s been a slow leaking boat for some time, but I think they are going to have to pass some laws about what these financial entities can do.

Congress is completely incompetent. What needs to happen is financial institutions, whether they are banks or brokerage firms or whatever, they need to make the directors and officers personally responsible for losses. Directors in Switzerland face that, they now face it in Brazil and it used to be that way in our country.

If these financial institutions, if the directors and officers faced personal losses, do you think anyone would have been leveraged up 40 to 1 in the last go around? You think any of this crap could happen? There’s not a chance. Congress is so stupid, they pass Sarbanes-Oxley, did that prevent anything in the last real estate bubble, any of these financial entities from blowing up? No.

Now they’ve passed this Dodd-Frank Bill. It’s just garbage. There are so many intelligent solutions to a lot of our problems and yet all they do is make the situation worse. It’s pathetic.

I’ve been rather vocal, as have others, about how useless financial statements are for financial entities for over a decade and nothing ever changes.”

The Bernanke Song: Don't Stop Me Now

(apologies to Freddie Mercury & Queen)

The Helicopter Ben Song

Tonight I'm gonna have myself a real good time

I feel alive and the world it's blowing up Yeah!

I'm floating around in ecstasy

So don't stop me now don't stop me

'Cause I'm having a good time having a good time

I'm a shooting star leaping through the skies

With Timmy Geithner, defying the laws of gravity

I'm a racing car telling lies to the Congress

I'm gonna print print print

There's no stopping me

I'm burning through the skies Yeah!

Two hundred degrees

That's why they call me Helicopter Ben

I'm trav'ling at the speed of light

I wanna make a Euro man of Sarkozy

Don't stop me now I'm having such a good time

I'm having a ball. Don't stop me now

If you wanna get a Bail Out just give me a call

Don't stop me now (I'm wrecking the Economy, its a good time)

Don't stop me now (I'm debasing the Dollar)

I don't want to stop at all

I'm a rocket ship on my way to Mars

On a collision course

I am a maniac I'm out of control

I run the printing press, ready to reload

Before all the Banks

Oh oh oh oh oh explode

I'm burning through the skies Yeah!

Two hundred degrees

That's why they call me Helicopter Ben

I'm trav'ling at the speed of light

I wanna make a supersonic woman out of Merkel

Don't stop me don't stop me don't stop me

Hey hey hey!

Don't stop me don't stop me

Ooh ooh ooh (I like it)

Don't stop me print more dollars, what a good time good time

Don't stop me don't stop me

Ooh ooh Alright

I'm burning through the skies Yeah!

Two hundred degrees

That's why they call me Helicopter Ben

I'm trav'ling at the speed of light

I wanna make a supersonic woman of Merkel

Don't stop me now I'm having such a good time

I'm having a ball don't stop me now

If you wanna get a Bail Out

Just give me a call

Don't stop me now ('Cause I'm killing the Dollar)

Don't stop me now (Yes I'm causing Inflation)

I don't wanna stop at all

La la la la laaaa

La la la la

La la laa laa laa laaa

La la laa la la la la la laaa hey!!....

Europe - Political Union ? or Killing Democracy to limit Bank Losses ?

Below are some important & interesting reads assessing the situation:

Lowry: European Union Killing Democracy http://www.nypost.com/p/news/opinion/opedcolumnists/adieu_democracy_VD4kzHpnzUC0JWNQwkrAJL

The Euro - What Next ? http://www.nationalreview.com/corner/284850/eurowhat-next-andrew-stuttaford

Contagion Catastrophe: http://nationaljournal.com/magazine/the-eurozone-s-contagion-catastrophe-20111201

Jacques Delors - father of the Euro ...

http://www.telegraph.co.uk/finance/financialcrisis/8932647/Euro-doomed-from-start-says-Jacques-Delors.html

Lowry Excerpt

There is a European Parliament, but not one with the powers or role of a proper democratic parliament. It can’t initiate legislation. It has no governing or opposition party. It can’t topple the government with a vote of no confidence. It is the unelected European Commission that initiates legislation and issues regulations. By some estimates, about half the new laws in EU states are drafted in Brussels.

This diminution in national sovereignty has been accomplished without worrying over-much what the peoples of EU countries want. Referenda on big further steps toward integration have generally been avoided. As Teddy Roosevelt shot back when an aide recommended he inform the Senate of a secret agreement with Japan, “Why invite the expression of views with which we may not agree?” Although there are elections to the European Parliament, no one pays attention to them, and their results reflect the standing of national political parties that fight on the basis of national, not EU, issues.

The recent cashiering of the prime ministers of Greece and Italy, who were replaced by a former vice president of the European Central Bank and a former EU commissioner, respectively, captured the undemocratic thrust of the European project. It was a technocratic coup forecasting how the laggards of the EU will come to be governed by Brussels — and essentially Germany and France — in a new fiscal union.

If Germany is paying the bills, shouldn’t it call the shots? But it shouldn’t be paying the bills for the follies of foreign countries or calling the shots. Greeks should be governed by Athens, no matter how dreary and dysfunctional this time-tested arrangement might strike Berlin.

The European elite claims that a reinvigoration of the nation-state will again risk war. Nonsense. Democratic nation-states didn’t precipitate World War II, the totalitarian ideology of Nazi Germany did. Are we supposed to believe that without the glue of the euro, Angela Merkel’s Germany would again roll Panzers across Nicolas Sarkozy’s France? Even without the EU, Europe would still be bound by trade, NATO and a mutual commitment to international norms.

DeLors excerpt:

Mr Delors claims that the current crisis stems from “a fault in execution” by the political leaders who oversaw the euro in its early days. Leaders chose to turn a blind eye to the fundamental weaknesses and imbalances of member states’ economies, he says.

“The finance ministers did not want to see anything disagreeable which they would be forced to deal with,” he says.

The euro came into existence without strong central powers to stop members running up unsustainable debts, an omission that led to the current crisis. Now that the excessive borrowing of countries such as Greece and Italy has brought the eurozone to the brink of disaster, Mr Delors insists that all European countries must share the blame for the crisis. “Everyone must examine their consciences,” he says.

However, he singles out Germany for its strict insistence that the European Central Bank must not support debt-stricken members for fear of fuelling inflation. The euro’s troubles spring from “a combination of the stubbornness of the Germanic idea of monetary control and the absence of a clear vision from all the other countries”.

Famous in Britain for his public clashes with Baroness Thatcher in the 1980s over closer European integration, Mr Delors says that he shares some of the concerns that were expressed by British politicians and economists about the euro before its creation.

When “Anglo-Saxons” said that a single central bank and currency without a single state would be inherently unstable, “they had a point”, he admits.

Because Britain is not in the euro, it is not “sharing the burden”, Mr Delors says. However, he claims that the UK is “just as embarrassed as the Europeans by the financial crisis”, not least because some of the measures put in place to deal with the crisis pose a threat to British interests.

For example, he says, the creation of a common “Eurobond” underwritten by all eurozone governments and traded in Paris and Frankfurt would be a “big worry” for the City of London. “I can see Mr Cameron’s worries,” he says.

Such is the scale of the crisis, he warns, that “even Germany” will struggle to find a solution. “Markets are markets. They are now bedevilled by uncertainty.”

October is Here

August & September were brutal, many are expecting October to be worse.

The following links have good analysis & commentary that are worth pondering as October begins:

http://www.robertsinn.com/2011/10/01/reaching-for-yield/

http://www.alphatrends.net/2011/09/30/stock-market-video-analysis-93011/

http://peterlbrandt.com/lessons-from-seven-weeks-of-stock-market-chop/

http://tradingwithtechnicals.com/deflationary-pressures-mount/

http://dragonflycap.com/2011/10/02/shades-of-pale-sector-review-1022011/

http://www.marketanthropology.com/2011/10/trilogy.html

http://highchartpatterns.net/miscellaneous-thoughts-including-market-talk-strategies-and-a-defense-of-dip-buyers-who-didnt-get-their-heads-bashed-in/

http://www.upsidetrader.com/2011/10/01/the-next-90-days/

There are other good analyses that I could link to, but those above provide more than enough color on the state of the markets, sentiment, and possible outcomes.

Let me simply point out, however, that with so many expecting a big flush, or "the final flush" any day now, it could be that too many bears are currently on board, so its also possible for an unexpected rally, or just more up and down gyrations that will drive everyone nuts.

AIG sells stock at $29, Ouch to Gov't, Fairholme

AIG is now down 31% from where I suggested to Bruce Berkowitz that he at least hedge, if not sell, his huge exposure. That's over 3 1/2 months !

JOE is down 21% in the same period.

MBI is down about 29% in the same period.

That's a huge ouch.

If BB were a hedge fund, as opposed to a mutual fund, his investors would have bailed by now.

I know this sounds like I think BB deserves criticism, or I don't like him, or something. That is just not the case. I only met him briefly that one time and I think he's a smart guy w/ a very good track record.

I am just mystified by the strategy of loading up on these dogs; riding them to huge gains; NOT CASHING OUT, and not hedging them ! His initial strategy, however counter-intuitive worked. But he didn't ring the register and is now paying the price.

Good luck Bruce. I would be interested in your thoughts on what happens next for your holdings in these names.

Bruce Berkowitz & AIG:I told him he should hedge his positions (MBI & JOE also); why didn't he listen ?

Over the weekend, I was thinking about writing a little piece here about a very smart and well regarded fund manager, Bruce Berkowitz, who runs the Fairholme Funds.

During 2010, Mr. Berkowitz had taken concentrated positions in several controversial stocks, notably AIG, JOE (St. Joe Corp), MBI (MBIA) and others. In my view, all of these companies were train wrecks, and I had on occasion played them to the short side.

News of Berkowitz' investments, along with his discussion of them in various media appearances, helped to rocket the stocks higher. In AIG's case, the stock went from around $30 to over $60. JOE went from around $18 to over $30, and Berkowitz faced off with David Einhorn, who had a well publicized short position in the stock.

Coincidentally, with AIG now $29 / share (again, down from $60 3 months ago), I noticed this on Twitter tonight.

Bruce Berkowitz Says He Was Wrong About AIG http://read.bi/lRyCuF

Yes he was wrong. Big time. Many Twitter and StockTwits traders & momentum chasers didn't believe me when I told them that these stocks were train wrecks, basing their views simply on chart patterns and Berkowitz' bullishness.

But I am writing this piece not to crow about being right.

What troubled me about Berkowitz' positions was not that he was long; it was that he did not protect himself through cheap hedging techniques from being wrong.

I don't know Berkowitz personally, although I did get to meet him briefly earlier this year at an investment conference in New York that he spoke at. He has a great track record, he is smart, and he seems like a likeable, honest, no BS kind of guy.

But he doesn't hedge.

How do I know this ? I asked him.

While I was confounded as to why he would take huge positions in stocks like AIG and MBI that were not only train wrecks, but black boxes that are almost impossible to understand, I didn't challenge him about that.

I just wanted to know if he hedged his positions, as I thought that he should protect himself and his fund. AIG for example, was going to be faced with the US government trying to sell its ginormous stake, representing 92% ownership of the company. That's a lot of selling pressure that hadn't even begun, and everyone knew about it.

Berkowitz should have sold down his stake during the run up, or at least hedged.

He told me that his positions were too large to hedge, and that is why he did not.

I thought that was ridiculous, but I didn't say so to him. I mentioned that I could show him how to hedge these stakes effectively and cheaply with options, but he didn't take me up on my offer, and I didn't push it.

I don't get how most long only investors that either can't, don't or won't hedge. Its nonsense and irresponsible in my opinion.

Anyway, I wish Bruce Berkowitz well, I had been meaning to touch on this subject.

Here are some charts of AIG, MBI and JOE ... the conference took place in late January or early February ... see what's transpired.