Wednesday, March 17, 2010

I'm done, it's official - Market Neutral

Since 2008 I have followed the stock market very closely. My goal has been to buy into a large portfolio of fairly valued large cap stocks with the intention of holding them forever. I am very happy with my choices:


All of them are large cap market leaders with minimal amounts of debt.

From 2005 until 2008 I was mostly in short term fixed income investments, so the last recession was a wonderful opportunity to buy into good companies at a fair price.

My goal has always been to trend with the S & P index. So now as the market has gone over fair value I have been buying generic hedges on my solid portfolio of stocks. FAZ and SKF protect my large holding in Bank of America and SPXU protects everything else. These are my main hedges which are presently protecting 60% of my stock portfolio. As the market has been going above fair I have been purchasing hedges. I feel that the fair value of the S & P index is around 1000 to 1050.

The last part of my "sleep at night" portfolio are my volatility bets. These also serve as hedges and round out the 100% protection of my portfolio. I am using: UNG, FXP and VXX. I am also planning on moving in and out of treasury bonds with TLT and TBT as interest rates swing wildly over the next few years.

Now that we are solidly into our next economic bubble my goal is to spend less time following the markets. I want to back away from the table and let the drunken Herd of investors move this market to whatever extreme their easy money intoxicated state allows.

As always, I am out of the market far too soon but this is always preferable to the alternative.

I can't start moving to a market long position until we are solidly into our next recession. But I will trade the volatility in the markets over the next year or two. I will try to eek out some gains as The Herd runs wildly back and forth in what could be one of our country's most dysfunctional stock market periods.

The S & P will probably go to 1250 or above as the government pumps trillions into our economy. Mathematically it's not sustainable but psychologically investors see nothing but green shoots and blue sky forever in the future. This is what makes me nervous.

So I will miss out on the last bit of this rally and watch from the sidelines.

This is just part of my financial strategy. I sold my house in 2007 and moved to a comparable rental property to save 50% on house expense. Then in 2009 I made the decision to cut my housing costs another 50% and moved to a very nice townhouse. So we are paying 1/4 of what we would be paying to own a house in Lafayette and giving up very little.

So for the next few years I will be able to save 50% of our household income. I feel this will be more than enough to make up for any loss of bubble profits in the stock market over the next year.

I would also like to say that as I am paying 1/4 the price of owning a home in Lafayette, comparable house prices in Lafayette will be trending downward. As I have stated before I will not buy a home above 2001 prices. How can anyone justify paying bubble prices in Lafayette when many other areas are hitting 2001 prices and below. This is happening while rent prices are trending downward. It may not feel like it because of the bubble but we are in a contracting economy. Paying over fair market value for assets in a contracting economy is a fools game.

My plan is to play it safe during what will be one of the most challenging economic periods in the last 100 years. I have no idea what will happen in the next year of two. But I know that now is the time to play it safe.

In 5 years our country's savings rate will increase, taxes will increase and market volatility will increase. Asset prices will come to equilibrium fair value after falling below fair value in the next recession.

Our country's standard of living must decrease proportionately as we work our way though this bubble and then through the third and hopefully last recession for a while.

We have lived though a magical period where money fell from the trees with the collapsing of the interest rate mega bubble, unprecedented debt creation and massive fiscal and monetary programs from our government.

This magical period is absolutely impossible to recreate no matter how many trillions are borrowed from our children. Our country's standard of living must decrease.

There is only one temporary alternative and I pray that our elected officials aren't allowed go down that road to perdition. Hopefully our children will be old enough by that time to stop the sale of our country to hostile foreign nations.

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