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Frame of Reference


Syncing time horizon with your risk profile makes all the difference.

"And you run and you run to catch up with the sun, but it's sinking. And racing around to come up behind you again."
--Pink Floyd

Where you stand is a function of where you sit. In today's marketplace, where you sit is a function of time.

As crosscurrents commingle on Wall Street, 2008 is shaping up to be one of the toughest tapes in recent memory. With massive amounts of information and razor thin margins of error, the financial field is thinning before our eyes.

Jeff Saut once told me that it's impossible to think about more than one thing at a time. That seemingly conflicts with the daily routine of market players but it's possible to compartmentalize the process.

There are four lenses with which to watch the freaky fray-nuances, trends, phases and cycles-and each requires a unique stylistic approach. The task at hand, regardless of which way you play, is to sync the risk profile of your portfolio with an appropriate time horizon.

It's easier said than done. In fact, and sharing my missteps with hopes that you avoid them altogether, I'll offer that this juxtaposition has been the single biggest pitfall throughout my career.

With humility and stability as a mindset and goal, let's take a quick peek where we stand:


The short-term volatility is vicious. Not only do we have thousands of hedge funds standing in a circle shooting at each other, we've also got remnants of an expiration hangover and the implementation of the short-sale rule pushing prices under the surface.

The upside is the action offers excellent opportunities to capture profits with minimal overnight risk. It's not for everyone-and there aren't opportunities every session-but for those proactive and patient, there's money to be made.

My daily tells include the financials, market breadth (when skewed 2:1), reaction to the overnight news and the high beta complex (Apple (AAPL), Google (GOOG), Baidu (BIDU), Research in Motion (RIMM)), particularly when they don't participate in opening gaps (either way).


Last week, I offered that the big picture blues we've long eyed in Minyanville finally arrived. On cue, Fed Chairman Bernanke acknowledged them, paving the way for the biggest financial rally in history.

After Thursday's mean-reverting melt-up, I punted my long exposure and with the exception of a small Google short (which I've since unwound), entered Friday's ride with a relatively flat book. It was a tenuous time to be a bull but with the benefit of hindsight, that was the easy trade given the massively oversold condition.

The reaction to news is always more important than the news itself. Given this week's earnings from American Express (AXP), Apple and Wachovia Bank (WB) the bovine need to stand tall-right here, right now-if the squeeze is to morph into something more.

Trading bottoms are traditionally littered with bad news and the fundamental data points this week qualify as such. If S&P 1260 can hold underneath, the upside should continue in the context of a bear market bounce.


The debt unwind will take years to manifest as deleveraging unfolds in phases.

The first domino was housing.

The second domino was the banks.

The third domino was financials in drag such as General Electric (GE), General Motors (GM) and Ford (F) that derive a large chunk of their revenues from finance-based operations.

The "easy trade" in those sectors has passed. While risk remains and dead men walk through their ranks, the baton has been passed to other vulnerable groups.

One of our Ten 2008 Themes was the other side of zero percent financing, or the financial crisis morphing into an economic, consumer-centric one.

We've talked about tech being vulnerable, both on the consumer and enterprise level. The action in Microsoft (MSFT) last week-and Apple this week- spoke to this.

Retail is flagged given its reliance on the consumer.

Ditto the credit card companies, perceived safe-havens given their processing revenue.

The final group to fall will be energy and commodities as a function of slowing global growth.

It could take years for this to fully play out but it's a road map for what's to come


Just as the debt bubble took many years to build, it will take time to unwind.

It is, in many ways, the mother of all bubbles, the definition of cumulative imbalances, seeds that were sowed during the Asian contagion and tilled anew after the tech bubble.

Time and price are the ultimate arbiters of our financial fate and the only legitimate hope for the integrity of our structural machination.

The bad news is that widespread denial persists and through the lens of denial, migration and panic-the three phases of any trading move-we have a prolonged and painful period of socioeconomic malaise ahead.

The good news-and yes, there is good news-is that those properly prepared will be in a fantastic position after the immediate gratification, buy now and pay later fat drips from the bone.

Once debt is destroyed and the Great American Financial Experiment ends, we'll finally have fertile soil in which to plant the seeds of a sustainable economic expansion.

Capital preservation, debt reduction and financial literacy remain our staunchest allies as we wade through one of the most interesting economic junctures in American history.

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