Let’s Talk Fed Day, Strategy, and Tax Losses

Okay, there are two main places I’d like to focus your attention.

The first is Europe. The situation got bleak enough that the whole planet had to pony up. When China is giving money away, you know there’s a problem. That government operates by the phrase “look out for number 1.” So we are probably yet again just days or weeks away from a total collapse of the system.

Think LTRO 1 and the implications it had. Thanks to that program, we melted starkly higher, only to see everything given back a mere four-five months later. However, they have raised enough money to keep the game going. The pressure will be off for at least a month or two, and that means we *may* see a melt up, like the last two times people were foolish enough to believe the system was saved.

The second place you need to focus your attention is the Fed (obviously). Everyone is hyped up as hell for the meeting tomorrow. I personally think it’s a non-event. The dollar isn’t as strong as it was the last two times QE was enacted; commodity prices are generally higher than they were the last two times QE was enacted; and our economy has had a few visible hits, but that’s no indication of us spiraling down the drain – at least not yet.

I am predisposed to believe that Bernanke will elect to wait for another month or two of data, like the scientist that he is, and hold emergency policy meetings if things require immediate intervention.

But, you’ll notice, I am only shorting this market through my ERY position, having sold out of SCO, and have added a full sized APC position, plus a partial stake in SLV.

That’s how much I’m willing to gamble on being right a.k.a. not really gambling on being right.

If Bernanke doesn’t enact QE and people freak out tomorrow, I stand to lose a lot of money. ERY will ramp by 50% inside of a month, but the rest of my portfolio will be set on fire. However, I’m okay with that, as I can use the opportunity to lock in gains on ERY, and await the inevitable monetary response – while tap dancing on your grave, as I’ve warned you is a possibility for literally a year now.

Which brings me to the last thing I wanted to talk with you about today.

There’s more than one way to benefit from price action in this world, and I’m not just talking about long/short comparisons. The ability to lose money and count it against your other gains is by far the most underappreciated strategy in investing. That you can take a few thousand against any fixed income you might be making is icing on the cake.

My SLV position is not just hedging – it’s sacrificial bait.

Case in point; tomorrow Bernanke announces “QE3-4-5-…and-6, bitches”. Well then, SLV will rocket, just as ERY collapses. SLV’s a lot smaller than ERY, on my book, but it’ll still help dampen the blow (APC would also go on a tear, offsetting most of my losses by the time I booked ERY). So I realize a loss, but it’s cool. The loss helps me offset my SCO gains from this year. Unrealized gains galore await me – which I can decide when to be taxed on.

But if Bernanke abstains, and every commodity hedge fund within 10,000 miles simultaneously explode, ERY is running higher like it’s on crack, and SLV will be absolutely decimated (along with everything else I own). But here’s the kicker:

Some of you are probably saying, “big whoop Cain, you’re not going anywhere.” And that’s not true. Because I am committed to my longs; and that makes all the difference in the world. I can ignore APC, CLP, AEC, and CCJ losing me money, because I’m invested in them. I will wait for them to come back – and they will come back.

Which leads me to SLV. If Bernanke pulls the punch bowl, commodities can be expected to get decimated. But some commodities, like silver and oil, are sure to do great over the next few years thanks to the US budget problems. I hate their prospects in the short run, because thanks to leverage, expectations of free bailouts, and stupidity, they are proverbial murder holes – Tom Hanks in Saving Private Ryan style.

But if you can go into the trade understanding that, then you can take advantage of the existence of multiple levels of exposure that ETFs provide.

Case in point; Bernanke sets SLV into a meat grinder tomorrow. Well then, in a few weeks, I will cover SLV for the losses, offsetting any gains I have this year. And then, when the time is right, I intend to roll my money over into a 2X silver ETF – because mark my words, if things get bad enough, central banks will have to support markets again. We all know that, it’s just a matter of when that makes all the difference in the world.

By doing that, assuming I get in somewhere near the bottom, with just the same amount of money as I take out of SLV, I can be back at even with just half a recovery – and a tax offsetting loss to boot.

Is this strategy full proof? No. We could sell off hard, then discover the economy isn’t going into a vortex, and never get that intervention. I could switch over at the wrong time and still lose a ton of money. But it’s important to plan not just for this move, but for the next most likely one too.

Take the time to set up your next plays, and the rewards can be well worth it. And don’t blow all your ammo thinking you understand the mind of a single academic thrust into the midst of the worst crisis of our time. You don’t. Accept it and move on.

The most important thing right now is to avoid margin, like it’s trying to slaughter your family. These kinds of strategies I’ve laid out can be implemented, provided you have the freedom to stand your ground. Once you’re at the whim of the margin lady, all bets are off the table. But with a little ingenuity and the patience of stone, you can get ahead no matter what happens tomorrow…or anytime in the future for that matter.

Investing is after all firstly an act of reason and intelligence, but second a byproduct of will.

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