Adieu

Good afternoon, dear ladies and gentlemen, on my final day in office.  I hope you have enjoyed our chats from the 9th floor fireside rug.  Sitting in my high rise chair of woven fabric (and rather stiff material on my lower back), I always enjoy a steaming cup of Darjeeling with our discussions (German rock sugar is a must, I insist); our times together are all very near and dear to my heart.

Ah, but!  Look, the market seems to be spoiling the good mood and comfortable atmosphere of my cozy craddle of conversation.  It will do that, from time to time, of course.  So unfortunate that it should make trouble for us here and now, while we wish to be free from toiling.

As the sun goes down, let’s reach for lamps of oil, grasping them close to our chests for warmth and light so that we can continue our times together.  December is a dark and dreary month, but one of celebration as well.  Feel the cold warmth of metal on your naked hands as the warming cold of winter sets in outside.  And take comfort in our hearth of flames; licking out to try and reach us with a happy tongue like an excited dog welcoming home its master.

Or take comfort in our choices, which leave us ready for this struggle.  Our coffers overflowing from our mettle; our balances all settled.  Our operations working steadily and paying us so readily.  And of course, our precious metals.

As the white light mingles with the red glow on our faces, in an elaborate and ancient dance, we’ll laugh and drink tanned liquids while reflecting on reflections that we have.

Bundle carefully for the cold; fully cover yourselves with care.  I would be most disappointed if I didn’t see you again..

Next time.

So I say to you…

Adieu

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As my 5^th reign as king comes to a close, I reflect on the month.  It was actually quite successful, if only for the stellar returns on silver, which have left my year looking bright again after my late game mishaps.

As I stand now, I have virtually no real margin, which is a rather wonderful position to be in.  I had almost forgotten how it felt to play with your own chips and not constantly be considering the consequences of errors and interest rates.  I’ll be holding myself in this position until the smoke settles.

In December, that banal month, where nothing happens, there is only one major trade which you should expect me to make.  With my other positions well within their boundaries and disciplines, and the holiday in effect, I will only be looking to unwind my position in silver.

The holidays, as I understand, are seasonally a relative high for the precious metals.  It will be an excellent time to sell half of my physical silver, covering the remainder of my debt, provided of course that silver is going for more than $30.  That’s the magical number I want. 

I think silver should trade higher than $30, but with 100% gains, I will relax my aim a little and play only with what is mine.  No sense keeping the risk of a run lower on the table when I have done so spectacularly in this trade.  To all of you gold bugs: Ha!  You see what could have been?

Of course, most of you are in both metals.  And, no sense of insulting your intelligence, I guess.  After all, you could be strictly in muni’s like some poor idiots I know of.  I wonder what it’s like, holding your net worth in a supposedly safe asset which you’re too myopic to see has been compromised?

Yes, it’s probably best we all just share a laugh at the expense of bondholders as the world teeters.

For my next trick, look for me to buy up foreign bonds at pennies on the dollar, as the destitute and desperate flee from the entire bond market with extreme prejudice. 

When will such action take place?  Why, I do have my sights set on 2011.  Perhaps, I shall see you there as king once more.

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A quick word on the expectations I have for this breakout on the Korean peninsula.

This isn’t necessarily going to escalate into full blown war.  Remember, the North already sank a South Korean ship and killed considerably more people than this, only a short while ago.  South Korea, in the broad scheme of things, has suffered far less than that in this attack, and they seem to have dealt an equivalent blow back, which is more than can be said from the previous encounter.

However, these things tend to cumulate rather than be initiated by one single action.  I’d guess, given the recent surge of violence, something big is preparing to breakout.  And, I think it’s going to be predominantly on the North’s side.

There’s something big going on up there.  Kim Jong Il is of questionable health, and his successor is, from my understanding, relatively weak and unknown.  By escalating war with the South, they may be attempting to manufacture public support for the young warlord-to-be.  As it is, several American Foreign Policy members have been advocating trying the young ruler when he comes to power, and trying to get some of the second in command types to create fissures in the government.  Kim Jong Il isn’t completely dumb, and he definitely has finesse with manipulating his own population.  This could be as simple as him trying to hold the nation together by lashing out at a common enemy.

That being said, I’m not particularly worried about a Korean war breaking out.  The North has too much to lose with a massive crisis.  It is a rather humorous reality that having the largest standing army in the world is irrelevant when dealing with the kind of large scale poverty that country has.

Millions of malnourished troops with poor morale just aren’t that big of a threat.

The real problem here is going to be relations with China.  Look for negotiations between the U.S. and China to get a feel for how things are going.  China has a serious bit of leverage in this situation, as they can effectively tell the North to sit down and shut up.

No?  Then no more food…

In fact China itself should have no desire to let a war flare up in its own backyard.  Consider, as I showed on the Fly’s post, Macau is raking in huge growth from the South Koreans  That’s all grand cash for the island vis-à-vis for China.  A North verse South war spoils all that.

Here’s the link: http://www.bloomberg.com/news/2010-11-23/macau-s-october-visitor-arrivals-summary-table-.html?cmpid=msnmoney

But, China has a lot to gain by playing hard ball with the U.S.  For instance, if I was a Chinese autocrat, I’d be tempted to play chicken with U.S. policymakers to get some of this criticism of their currency manipulation off the airwaves.  I’d also be getting tired of U.S. Congressmen criticizing Chinese exports as the cause for U.S. unemployment.

In stocks, I’d be tempted to take some cash off of the major casinos, immediately, if I weren’t in MGM specifically.  The other major players who are already in full recovery are going to get hit hard, particularly if Seoul residents start to feel like they should conserve for a grueling bout of hardships.  The second largest growth prospect for Macau right now is India, and in the last three months that’s been at a great distant second.

That being said, I don’t think MGM, specifically, is in a recovery yet.  Not so much as an anticipation of a recovery.  So, dropping it doesn’t make as much sense.  They’ll be no more screwed if Macau gets hit than they already are.  But, if you’re holding the other major casino operators, keep your head low and look for an opportunity to buy in at lower pricing.

Elsewhere, I never really trusted Asian stocks anyway, so there’s not much insight I can give specifically.  But, as I said, I don’t think China will really allow this to go down.  It could prove a big dip buying opportunity, and that’s the way I’d be ultimately tempted to play it, if there was any quality Asian company which I cared to own.  In the casino space, I’m not selling, but that would probably be my biggest temptation; buy up non-MGM casinos after panic from soon to be realized exposure, in anticipation that the exposure is overblown.

More importantly, on the currency front, this could be ground for agreements that keep the status quo for the Dollar/Renminbi as is, which could be significant for our markets, depending on what’s baked in.

I don’t know.  Maybe we just tell China we don’t care if war breaks out and let them handle it?  But I think our politicians are too nosy for that sort of self restraint.

I really don’t like how much leverage this gives China.

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Allow me to make a coarse point here: I have no fucking clue where this market is going today, tomorrow, or anywhere in the foreseeable future.

That’s not to say I’m not seeing some happenings in the marketplace with crystal clarity.  I actual am spotting several very important developments which have me quite fixated.

No, rather, I just don’t have a good feel yet for how things will ultimately play out.

We have some powerful undercurrents here which seem to be at odds with one another.  I’m not going to make guesses on tomorrow’s temperature with these hot and cold fronts crossing each other as they are.  All I can say is that tornado’s can come from weather like we’re seeing now, so I’m going to concern myself with boarding up my windows instead.

A few points:

• Asian markets are overheating because of their currency devaluations.
• Europe is once again stalling out.
• American municipalities are in a serious funding crisis.
• The last round of economic data hasn’t been bad.
• Our economy doesn’t necessarily depend on the prospects of the unemployed improving; our system can pick up from simply cutting these segments of the population out of their positions, effectively putting in a bottom.  I’d guess this has been happenings, in some form or another, for the last two years.
• Home prices across the country have depreciated substantially to make renting economical for landlords.  However, shit is still way overpriced in a few key areas.
• $600 billion in devaluation is a very large sum.
• Austerity seems unlikely at first glance, given gridlock.
• The Deficit Commission report was fairly well received.

So what’s the point?  With key developments in the Euro countries again putting pressure on their currency, the dollar is bound to strengthen and, thereby, our markets are sure to pullback.  Yet, the Fed is working tirelessly to see that this doesn’t happen.  Where is the dollar going?

American municipalities blowing up spells trouble for the economy at first glance, yet how much does the American economy really depend on suffering people receiving aid from local programs?  And now, key employment data has seemingly been improving.  How will it all play out, and what will the market look like in response to these developments?

There are lots of other questions.  What role do financials play in the market at this time?  Do housing prices really matter, at this point?  Does the Fed find itself to be subject to the will of common politics nowadays?  Will programs be cut, or will emergency aid be granted?

All of these questions, which in varying magnitudes can mean radically different outcomes, I do not have answers to.

So instead of running around making asshole predictions about where these specifics are going, I’m going to exercise self control and discipline.  I can’t control what all of these complex relationships are doing.

But I can control myself by staying out of their way.

For the last couple of weeks, I’ve been conducting myself by four points:

1. Hold institutions at their word.
2. Keep my planning to my scale.
3. Balance existing position sizes.
4. Look for the signs.

I’m at least willing to steer clear of holding any form of currency, since the one thing every government in the world seems to be saying clearly is, “We plan on fucking you over.”  Thanks for the heads up guys.  Now stay the hell away from me.

Meanwhile, margin could escalate my problems, if I get caught on the wrong side of the tape, long or short.  So it’s gone.  Loading up on margin was an obvious move back in ’09 after everything was reversing hard.  And it still makes some sense to keep my credit position on my silver holdings.  But even for that last one, it won’t for much longer.  The Gold:Silver ratio has been closing, and while I like the prospect of both against currencies, it’s high time to settle obligations and only play with my own money.

Also, I’ve scaled back my margin by cutting from my largest positions, like APC, NRP, or recently VZ.  These things were mammoth next to my other holdings, mainly because they’ve been on hot streaks.  But because of those high flying moves, I see them as more risky versus my solid holdings.  I like holding a few positions, each worth somewhere between 10-15% of my net accounts.  But, when individuals start outpacing the others, taking up 20-25%, it’s time to start reining them in.

And finally, I’m going to keep my eyes open.  I can’t see what’s happening now, so I’m not going to make long term plans.  But when I can see clearly what’s going to happen, then I’ll commit.

Then and only then.  Not until.

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It’s time for tea leaves and astrology in the 9^th floor office of Thaler.  I have a long standing policy of looking ahead for what I think may be coming in the month of November, before my mind is warped by tryptophan and truffles of the holiday.

The simple fact is, whether the future looks beautiful or bleak, during the holidays I am incapable of honest assessment, being all hopped up on jolly visions of a fat man in a red suit, and tidings of joy and God.  I’m a fairly skeptical and down to earth person, ten months a year.  But this final month and a half I just refuse to be in bad spirits.

Even when writing of starving hobo’s frozen in blizzards, as I was to be this time last year, I was in such a jovial mood and good spirits, a smile was on my face the entire time, and warm tidings in my heart.  Not to mention spiked Egg Nog…

I wouldn’t have it any other way.  Amen, and Merry Christmas.

Also, false confirmations will abound for the next few months.  November is notorious for huge runs as coked-out shoppers stampede one another for half priced dish sets and automated hamsters.  And December, the Banal Month, is never to be taken at face value.

So, if I’m going to be honest about things (even plain realistic about good things) I’d better do it before next week.

But first, a quick look back at last years predictions and how they faired:

1. Fed raises rates in March or April, in response to improving economic data.

In reality, the Fed raised rates sooner, but insignificantly.  Incorrect.

2. Real estate will suffer from rate hike, dragging market into lower correction.

Real estate shored up, but seems to be in another run lower, unrelated to the small rate hike.  Market wavered higher and lower in 2010, but not in response to anything I foresaw.  Incorrect.

3.  Bankruptcy filings will increase unexpectedly after Christmas.

Not noticeably, if at all; in fact, it appears they are about to increase now, having been staved off by various government fiddling.  Incorrect.

4.  Credit card companies and banks get hit after first of year.

Nope, they shot considerably higher.  Incorrect.

5.  Healthcare passed, no public option, costing more than $1 trillion.

Check.  Even the cost is decidedly now more than $1 trillion; almost no need to hold off claiming that one.

6.  SS, Medicaid/Medicare will be addressed.

It now appears that this will be issue of the next Congress, for 2011.  I’m rolling this prediction forward.  But, for the year, it was incorrect.

7.  New standard currency for purchasing oil.

Didn’t happen this year, as Domestic currencies of any nations with the drive to push for this sucked far worse than the dollar.  However, this is a must to further the agenda’s of non-US nationals.  Look for it in the coming years.  Incorrect, but rolling forward.

8.  Democrats lose big in elections; Republicans take house.

Nailed that, especially by not predicting what would happen in the Senate.  Also, local elections were a right wing flood, as I eluded to.

9. Recovery announced, with unemployment falling/forced below 10%.

Also nailed this one.

So, there’s my first year record.  I’m rolling a number of those predictions forward, as specified.  Remember, the objectives of major players in the world should always be considered before blindly analyzing data.  A few of those former predictions are based on what some very influential people are going to want to happen, rather than what has happened or appears to be occurring now.

So, next year’s predictions:

1. Fed will succumb to political pressure and raise rates towards the end of the year, (after housing has declined further?).
2. Fed will cut short the $600 billion devaluation in direct response to overbearing pressure, but not until at least $300 billion has been released.
3. The GOP will threaten to filibuster a raise of the debt ceiling to force concessions.
4. In response to a combination of the last two points, and before/beyond the first, the dollar will decline by at least 20% more.
5. Grain futures unexpectedly decline despite inflationary pressure, in response to production recovery in the Russian economy.
6. Social Security, Medicaid/Medicare are addressed.
7. New standard currency for purchasing oil (the whole world wants it but us).
8. Chris Christie the GOP nominee for president.  Barrack Obama the Democratic nominee.
9. Elements of healthcare bill repealed, such as the new business tax filing requirement.
10. Unemployment falls below 9% (as recorded) in positive response to gridlock in Congress, along with specific popular legislation which improves the atmosphere for business.
11. Bankruptcy filings pick up as support programs fall to austerity.  This means financials will face gruelingly uninspiring prospects for 2011. 
12. Home foreclosures pick up (now?  Really, these people can’t afford these mortgages any more now than they could at 25% higher price valuations).
13. Nasdaq keeps below 2650 (I’m giving a healthy range of upside now just in case people go ape shit in tech names for the holiday) on average for all of 2011.

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Pardon me if I’m not sharing in the market’s exuberance.  I just feel that a successful IPO of GM is a very stupid thing to get excited about.

Certainly, GM is doing very well.  They stole their entire fucking operation, so of course they’re doing well.

Let’s be clear on something.  I swear now on my very life, I will never own General Motors stock, be it common, preferred, or else wise, nor will I ever lend them money.

You would do well to conduct yourself accordingly.

Now, I could get behind this rally on the recent economic data, save for one very important point:

California.

Well, not just the Tarnished State, but also the state of municipalities in this country.  I’m willing to make a bet now why Ben Bernanke is so adamant about his cash infusion, and I don’t think it has to do with banks or bonuses.

I think the fireworks of municipalities and states may be picking up.  There are some rather terrible truths in that little cookie jar.  Like that public pension plans are completely unfunded.  Or unrealized tax revenue attached to vacant homes makes up much of the stated credibility of local governments.

I’m slightly long, and I’m not holding myself as I did before (asininely short with crack), but I’ll keep some reservation, thank you very much.

I’ve made enough easy money the last two years.  No need to lose it all now.

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