Grinding through the agony

(written earlier on today...)

Flash Rabbit is now seriously underwater and has had a number of his long positions totally caned. Some, like WS Atkins and one of the BT positions, have fallen by the wayside, and, as of 8.20am this morning, most of the others are hanging on by their fingernails. Flash took some profit on his 11100 Dow long but gave it back mis-timing new long positions – evidently the bottom has not yet arrived, and that’s hardly surprising given the grimness of the news. But it’s precisely because of the volume of the grimness that Flash is clinging to his long equities, short commodities view.

The one set of trades that have worked out reasonably well are the currency trades – Flash pretty successfully has been in and out of short EUR/USD and short EUR/JPY. Flash’s basic view is that while a lot of the attention has been on the unravelling of the debt crisis in the US, the omens for a deflationary bust are piling up in Europe and the value of the euro is looking increasingly untenable. Trouble is, the value of the dollar is also looking about right given what a dire state the US economy is in. But there must be an adjustment and Flash remains of the view that being long the dollar is the correct medium term call. However his long dollar positions are being stretched to the limit right now, but isn’t that the point of markets – to stretch tolerance to the limit?

It’s interesting that whilst nearly all other commodity prices have fallen over the last couple of days, oil and gold have stuck to their massive highs – and in the case of gold, as investors look for something – anything – that might go up in value – a huge spike in the price. But Flash thinks that this is underpinned by a quest for security rather than anything more substantial- if the price does begin to drop, it will drop very fast as the market gets flooded with gold and positions unravel. And if the rest of the commodity complex begins to drop as demand slows and inflation bites, it’s very hard to see why gold wouldn’t follow suit. For this reason he has opened up a short position in gold from around 972 (although he has been trying to short gold since about 945 and been caned in the process). Once again, he wishes he hadn’t closed out the gold longs that he put in place around 860. Flash, being impetuous and impatient, has once again failed to observe one of the golden rules of trading – of letting profits run. However he is learning about this the hard way as he sees his money going up in smoke.

Flash added to his short position in Thomas Cook yesterday – which helped to hedge some of the long losses, and he also went back short Allied Capital. He took a quick profit from his Starbucks short and tried to go short of Lehman Brothers but mistimed the entry and the exit points, being distracted by something else altogether. As ever, he wished he’d kept the erstwhile shorts in place. He doesn’t have any index shorts at all and would feel a lot more comfortable if they were there. This is deeply ironic because he has correctly called nearly all the key drops in the indices and made quite a bit on the way down, but just hasn’t managed to keep faith in his longer view that the market was heading for a very, very, nasty patch. Which is strange psychology really because he was absolutely convinced that it was the case. Right now he has a nasty feeling in the pit of his stomach but is trying to muster the courage to see his view through. If there is even a modest bounce he will have a lot to celebrate. There’s a lot at stake – perhaps rather too much – and if the next couple of days prove to be as difficult as the last few, Flash will seriously scale back his exposure. Locking the stable door after the horse has bolted? (Sealing the bank vault after the robbers have taken the lot?) Absolutely. But it’s a mistake he will never make again.