Margins, errors and unknowns

Trading plan for this week - try to stay cool calm and collected even as the hurricane batters the Gulf of Mexico and oil perhaps spikes though the roof. On the evidence of a late Sunday night, the currency markets seem to be shrugging off the oil spike and USD/GBP, EUR/USD and EUR/JPY are behaving perfectly, from Flash's point of view, i.e. euro down, sterling down, dollar up, yen up. And if the hurricane isn't quite as bad as expected Flash is perfectly poised to take advantage of any bounce of relief when normal trading resumes on Tuesday.

Flash has Dow longs in place from 11180, 11365, 11378 and 11428 and he is hoping to hold onto them through thick and thin this week - if not there are stops in place which will ensure he doesn't lose any money. Everything in his fund is broadly unchanged except that he's bought even more HBOS and Barclays, and has dipped a toe in the housebuilding market with a purchase of a long position in distressed US housebuilder DR Horton. He might also buy some Taylor Wimpey tomorrow. On Friday he bought more Ambac, BT and Lehman as well...He's hoping that there is enough margin in most of his positions to ride out the volatility. The accuracy of the currency bets is offsetting the dampening of profit on the long indices - but flash remains long on FTSE, S&P and the Dow, and is hoping to stay long for at least a couple of weeks.

One anxiety is that his fund is totally underexposed to the opposite view - that the banks and housebuilders are fucked and that the dollar is as much of a basket case as any other currency, that demand exceeds supply in commodities - energy especially - and that the price of oil and gas could be headed back into the stratosphere again if supply gets seriously disrupted either by acts of natural or political/diplomatic violence. Of course, if energy prices do rise further and inflationary pressure builds back again it's hard to see how any of the world's economies will have anything other than a serious crash landing. Flash thinks that if oil goes sky high again then demand will be choked off even more, meaning that it will correct back downward because everywhere will be plunged into deep, deep recession. So the disinflationary call from a macro perspective remains valid, whether the disinflation takes 3 months or a year or more to work through. The other bit of Flash's view is that everyone KNOWS that the banks and housebuilders are fucked and therefore they are a total bargain at the prices they are trading at. Most of his long financial positions have sufficient profit and stops to make sure that he can't lose on them, so the risk/reward of taking his view seems pretty solid.

And even if we have even grimmer data/terrible results to come, it's the overbought commodity and resources stocks, and the other traditionally defensive plays that are likely to come down harder. Well, that's what Flash is betting on anyway, and he has stops and margins in place in case a major rethink proves necessary.

PS As a hedge against some of this inflationary uncertainty Flash has broken the habit of the last couple of months and taken out a small long position on the Gold Dec future from 838. It's purely a hedge - if the rest of his view falls into place then he will take a small loss, but given that oil is likely to be nasty this week, Flash is willing to take this risk.