Careful with that margin, Eugene

The last 24 hours of trading have been a perfect lesson to Flash Rabbit in how NOT to apply the principles of 'less is more'. It hasn't been an unmitigated disaster, by any means, but to set it in context, by the end of Monday Flash's fund was 400% up from the February start and by the end of today it was back to under 300%. A 28% drawdown in less than 24 hours. Ouch.

Surely a sign that

a) the fund is overleveraged and
b) Flash is overtrading.
c) in these markets, it doesn't pay to take anything for granted.

A few examples.

Flash caught the upward rally in the dollar mid-morning on Monday perfectly but didn't have the confidence to run the position in EUR/USD, GBP/USD, and sacrificed around £400 of potential profit. No loss, but not nearly the gain that could have been. He did get AUD/USD on the nail and picked up a nice £350 from that trade.

Flash had Dow, S and P and FTSE longs in place from excellent levels (put in late afternoon on Friday) and caught pretty well all of the spectacular bounce in equities. However, instead of leaving them alone, and take some profits, Flash greedily decided to leverage up his position by moving some of the stops and trading on margin, adding new S and P longs at 1240, 1250 and even (arrogant idiot!) 1270. Well, that's great when the market appears to be going up (and Flash was out for most of Monday, so he didn't really experience the seasick yo-yo signals which are a sure sign of some nasty action to follow), but when the market decides to tumble hard, as it did today, and you're way overleveraged, it just eats up your capital even faster. And Flash, being flash, decided he knew better until he started to feel sick, and took some of the initial dip this afternoon as a buying opportunity for UK equities, which will probably leave his P/L even more painfully reduced when the UK 'adjusts' to the US' action tomorrow.

Flash had an excellent long position in AMBAC from around the 550 mark. Again, instead of just leaving it alone, he nicked some of the margin from this successful trade and leveraged it up. So when AMBAC tumbled from its highs around 880 to around 750 (which in theory should still give plenty of room for maneouvre on a 550 long), Flash was caught with his trousers down - the two extra positions he'd added at 780 and 800 were stopped out fractionally above break-even (ie zero gain) and the tasty AMBAC long turned to toast as AMBAC hit the stop at 720. OK so he had another couple of hundred quid to add to his trading capital but the greedy rabbit had already spent that opening up new longs in his ragtag bag of equities, which in the light of today's events are pretty appalingly judged. Of course, the financials could be in for even more blood letting, in which case it'll be great he got out of Ambac when he did, but Flash's big picture macro call is that we have to see some sort of proper recovery for at least some of the financials or otherwise we are heading into 1929.

Lehman went to pieces too. Flash hadn't leveraged that one so at least he just put it in his pocket - a quick £60 gain as the stock crashed through his stop at $14.00. He's opened up another blind Lehman punt just before close of trade today for a tiny 30p a point from around 770 - no prob if it goes to slash and burn, but nice bonus if some sort of rescue operation is mounted.

Flash has been eyeing Scottish and Southern Energy for months now - he's seduced by windmills and hydro, and because he's made a pretty big pile of cash, by his standards, he pumped a bit in to Scottish and Southern this morning from 1390ish, only to to see the dam break and the reservoir empty as the price plummeted to 1365. Something to do with Darling not ruling out the windfall tax for the comrades at the TUC, coupled with tumbling wholesale energy prices? He's set a stop at 1310 (roughly where resistance is on the chart) and will try to hold this one for the long term.

On the positive side, gold behaved exactly as Flash expected today - he's been watching it hovering around the 800 mark for some days and as oil slid, gold went south - great stuff - shorts running towards a four figure profit on gold now (for the second time this year), and Flash is targeting a crash down now for gold to around the $720 mark or even lower. He can't see any reason why it needs to be any higher - unless that is we have the mother of all market meltdowns in which case it might represent some sort of flight to safety - but see this piece which has persuaded him that the gold bulls are wrong. The disinflationary trend is just too well established now, plus so much cash has been burned going long on commods as they've tumbled, that Flash thinks gold can only go lower. On the evidence of the last 3 days worth of trades, where he has been cautious where he should have been confident, and confident where he should have been much more cautious, he'll probably be overconfident and wrong on this call too.

Flash had the foresight to at least bang on a quick Dow short around the 15000 mark and that has offset a fraction of the pain and damage caused to his long view by the nervousness

So, from the outright long call of the weekend, we are now back into hedging/check and balance/risk reduction territory. Stops moved on 3/4 of the HBOS position up to 290. Can't lose but may not be onto such a winner as he thought.

If things carry on like this, Flash will be forced to become much less flash and much more cautious. Even though his Templeton antennae are saying buy, buy, buy. Fine if you're a billon dollar hedge leaping thoroughbred, but the problem for micro macro rabbit market jockeys is that if you don't have the margin to ride the volatility, you just get chucked off the horse. Right now quite a bit of his margin is being used to prop up some badly judged FTSE long positions around the 5450 and 5500 mark. And another chunk of it was eaten by the market gods as a sacrifice to overconfidence and overleveraging on the S&P 500.

Perhaps the action today was just everyone getting out before the whole thing goes to pieces. In which case a short in gold and a short Dow position won't shelter Flash's fund and he'll give up another 10% before he can hit the 'sell' button tomorrow morning.

So can gold save the day? If deflation goes faster and deeper than everyone thinks, then what are the implications for equities? Flash thinks a massive rally for large cap consumer stocks. Or perhaps it's not so much deflation, it's just a total liquidity crisis - everyone, including the banks and the Fed, run out of cash, so no-one can buy anything, so all the prices drop like a stone? Answers please!

PS Apparently Lehman is revealing its skeletons tomorrow. That will be a relief, whatever the outcome, but we can expect a nasty, nervous market early doors. As a precaution Flash is considering taking the loss on all but one of the FTSE longs and opening up a short position in FTSE before he hits the sack tonight.