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Random Thoughts: Risk Management Over Reward Chasing


Play it safe in this volatile tape.


Editor's Note: This content was posted in real time on the Buzz & Banter and is being shared here for the benefit of the Minyanville community. These thoughts are a continuation of Random Thoughts: Looking Back As We Look Forward and Morning Dew: Preparing for a Wild Session and Random Thoughts: One Foot in Front of the Other.

Dear Headlights - 11:47 am

  • The prevalent mood on the street today? Shock. As that morphs into acceptance, reality will set in.

  • Social mood and risk appetite shapes financial markets. That mood--and that risk--took a historic turn today.

  • I do believe that this was a healthy and necessary step but don't confuse that with an "all clear" signal. There needs to be purging and panic and lower prices still.

  • Main Street has little sympathy for Wall Street but make no mistake--what we're seeing is tragic. Societal acrimony continues to percolate and I'm hearing a lot of "they got what they deserved." Hogwash. Nobody deserves to be wiped out. Nobody should ever have to look in the eyes of their hungry children. Not everyone is evil just because they happened to work in a particular industry. Empathy over acrimony as we find our way, please.

  • T-Minus four hours until the redemption notices hit. Just keeping it on ye radar yo.

  • I've taken to carrying a small, gratitude rock in my pocket. Each morning and each night--and every time I reach in my pocket--I'm reminded of all my blessings. I'm not as wealthy as I once was, but I'm entirely more grateful for what I have. Net worth isn't self worth, having fun isn't being happy, the purpose of the journey is the journey itself.

  • Deep breathes, my friends, and lucid thoughts. This too, shall pass.

Are You Ready for the Next Wave? - 12:52 pm

  • Bad times define good friends? The French ministry of finance just hit the tape to say that the Lehman Brothers (LEH) crisis would have limited impact on the French. Thanks Pierre--and you wonder why your country gets such a lousy rap?

  • Want a little more perspective? The S&P, NDX and INDU are all trading at levels last seen...Thursday.

  • I'll admit to being tempted on buying AIG (AIG) under $5 this morning. When push came to shove, I didn't have an edge other than my instinct that the specter of infusion would spur the stock higher, if only for a trade.

  • Why just a trade? AIG has a market cap of $16 billion and is seeking $40 billion in loans. I wasn't a math major but...

  • Remember the analogy that trading has turned into a huge game of chicken with cumulative imbalances on one side and government agendas on the other? That very much remains in play despite the new religion they've seemingly stumbled upon.

  • I wanna rant about this market stealing my one, primary escape--Sunday football--but realized there is so much pain in the world, it would come off as extremely myopic and selfish.

  • Peering around the corner, I fully expect the Federal Reserve to lower interest rates, particularly given the 25% pullback we've seen in commodities since July. That's largely why I called an audible and bought--rather than sold--USO calls on the opening. Again, just trading and I'm not married to anything (or anyone).

  • The risk--and make no mistake, there is massive risk out there--is forced liquidation and continued contagion. Lehman Brothers isn't the only toe tag out there, it's simply the most visible. A lot of funds will be forced to unwind bets, which has the potential to feed on itself in profound ways.

  • I would draw Minyans' attention to the one group we've been highlighted as potential long candidates--the consumer non-durables. General Mills (GIS), Procter & Gamble (PG), Coca-Cola (KO), Pepsi (PEP) and Campbell Soup (CPB) are all giggling green and, while I've sold my exposure in that complex, it warrants a mention as we find our way.

  • When in doubt, sit it out. You'll surely miss opportunities but the goal is to stay in the game. Nobody is more excited about the eventual recovery than I am--seriously--but that's not a discussion for today. Keep your powder dry, your eyes open and your wits about you--the next three hours will likely be nuttier than Austin Powers' coffee.

  • Minyans should be prepared for this, moreso than any other community in the world. This is where we earn our stripes--this is where we show our stuff--this is where we stick together and whether the storm. Be strong. Be lucid. Be a Minyan.

Answers I Really Wanna Know... - 2:01 pm

Risk Management - 2:46 pm

How bout that title, eh? Can you tell I've got the creative juices flowing? Isn't it obvious I was up until 3:00 am? I'm tellin' ya, Robert Hunter has nothing on me today. Rhythmic beauty at its best...


  • I was trading Todd-lots to begin with today but my risk is pared from those levels. I've sold my Continental (CAL) puts and USO calls as a function of discipline and with an eye towards capital preservation. Call me a coward but I'm a solvent coward.

  • The single biggest fly on my screen? Nope, not AIG (AIG) or Lehman (LEH) or Wachovia (WB) or Goldman (GS). It's the VXO, which just turned thirty and remains half the age of previous pain fulcrums.

  • S&P 1200 is the intraday low from the July whoa. Keep it on your radar along with the million other MIGS that are furiously firing at us.

  • Gun to head into the close? Down 500 points plus, with a conscious nod to my flat--not short--portfolio.

  • As perverse as it sounds, I truly believe that this was/is/will be a necessary evil that brings us one step closer to the eventual recovery. The sooner we go through it, the sooner we'll get through it. Yes, we have time--and further price declines--but it's always important to take a look at the other side or the ride.

  • Be smart and be cool, Minyans--you're more prepared than most for this.



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