Profit Protection Panic

That was yesterday. Beefers fearing erasure of their year's returns - and their paychecks - dumping almost everything. They had played heavily in the energies, so dumped those. And the Russell is a favorite sandbox. Hence it's smashing. There was no real news. Just a profit protection panic. There are unpredictable and this is the third one deemed due to "subprime" in the last six months. Yet is there any sign that the real economy - the non-speculative one - has changed? No.

The debt markets of the real economy is dominated by qualified home mortgages that FNMA or Freddie Mac can buy and in the corporate sector by investment grade debt. Derivatives have turned the non-investment grade markets into beefer playgrounds, so with no defaults and no defaults in sight, they can push it around with impunity. The major markets are too large for them to move and are dominated by real buyers - big buyers.

I bought a big position in some big cap financial yesterday and Wednesday: BAC, C, JPM, and MS with the BAC position almost half of the money I invested. These are long term positions that I think will give me the 30%/year return I endeavor to achieve in the Alpha Fund. I plan to double this position over the next few months. At some point I'll flip that long S&P futures position as I now have stocks replacing most of it.

I'm going to analyze the Krypto Fund and if I sell some bonds to buy stocks, I'll post a "PS". This decision is mostly just a mathematical exercise of reallocation, but I admit I add a little of my outlook to the mix through the portfolio percentages.

PS: I do need to sell some bonds and buy some stocks. I might do that today or Monday, depending on the action.

PPS: I wrote on March 13, 2007 about how the subprime loan problems could influence other markets beyond residential mortgages, viz. through the CDO/CLO/CBO markets. That appears to be what is causing this "credit crunch" in the corporate markets - a crunch without real corporate defaults or problems. The "brains" on the street put some subprime garbage in those CDO/CLO/CLO trusts and hence the subordinated classes of some of those got hurt. That scared the beefer holders and so they've been dumping. And toss in the ease at which they can short derivatives connected to those securities, you can get a panic without reality. Without buyers for subordinated classes of CDO/CLO/CBO debt, those become impossible to create and since that's been a place for high yield debt - especially the debt with crappy terms - that debt is now unmarketable. High yield debt needs realistic terms that attract real buyers.

Re-reading my old post, I wish I had followed this closely as that fear I expressed then came true months later. Maybe I could have seen this in July and made a good trade. BUT for long term investors notice that stocks are still way over the levels of March - S&P was at 1370 then, now it's at 1470. So being scared out then was the wrong decision - a loser. That's why I wait for reality to make decisions for long term investing. These beefer panics are unpredictable and have no sustained meaning for the real economy

P^3S: Good GDP and inflation news this morning. That confirms my outlook for the economic trajectory. I'm definitely a long term big buyer for Krypto Fund either at today's or Monday's close.

P^4S: I sent the orders in to sell bonds and buy US, Europe, Pacific and Real Estate index funds. RE had really gotten smashed. My timing might not be perfect or even good, but I figure that in a year this move will show a big gain. I get the closing prices as these are index mutual funds. I figure real buyers are standing back while the beefers play, so am hoping for a lower close.