Rethinking risk

After the agonising drawdowns of the last couple of days, Flash is stepping back and reassessing his view.

A few problems.

The disinflationary call has worked out perfectly - gold plummeting, dollar strengthening, and it's only really these trades that have kept his P/L afloat. Flash has been short EUR since way back when and reintroduced short EUR/JPY back to his fund late yesterday - now showing a nice profit, and EUR/USD broke through the 1.40 mark and now is headed down - Flash is looking for 1.25/1.30 as the next call (unless the Fed decides that an emergency rate cut is needed to stop the markets from tanking). Gold likewise - $720 an intermediate target but Flash thinks $600, with oil at about $85, would signal a real depression/recession.

But the second part of the call - that this should lead to a rally in equities, specifically some of the banks and large cap consumer stocks has eluded him. Shocking results today from Home Retail Group (and more to come, no doubt) have hammered Kingfisher, one of the stars of his portfolio since he got in there at 96p, and HBOS has taken a beating in the last couple of days. Stops are there to lock in some measly profits, but it ain't looking great for any of the financials or the retailers, or most of the other FTSE 100 stocks that Flash impulsively picked up on Friday afternoon - Unilever, Pearson, Scottish and Southern Energy and Marks and Spencer. Way too much trading, way too little assessment of the potential downside.

The Lehman raffle ticket got stopped out for a derisory gain of £2 - enough for a packet of chips which is probably all the bank may be worth. Flash was tempted to buy back in but he thought the better of it - he did however buy some more AMbac which again may prove to be a costly mistake.

Being impulsive and naive, Flash closed out his Dow short from 11500 when the market looked like bouncing early yesterday afternoon - for a while he thought he'd done exactly the right thing but this morning he's wishing he'd left it alone. Nothing now on the dow chart really to stop it retesting the 10900 level, or going for an almighty bust below 10000.

And yet - and yet - being bearish on equities has become such a consensus trade that Flash can't help wondering if there's some value in doing some buying. But in this market you need major confidence or deep pockets - and Flash's confidence has been ebbing away over the last 48 hours, along with a sizeable chunk of the cash in his pockets. On balance he is still more bullish than bearish about the USA - the UK he's becoming more circumspect about by the day. Very, very difficult markets to call, but it ain't looking good for the FTSE 100. Not at all.

Flash has quite a bit of his fund in small caps too - and there's been no spectacular action in these; on the other hand, the small caps he's invested in have largely flatlined in a really volatile market which gives him some hope that they were the right call - Tribal Group has held it's own all the way through the volatility of the last six months, and Workspace Group, in spite of its threatened relegation, has really done rather well - up to 140ish from where he bought them at 118. Cineworld holding up well too, Axeon crashed through his stop at 40p yesterday and he took a serious writedown - 5% of the fund - on that one. So much for energy efficiency and innovation. (What the hell were you doing putting 5% of the fund in an obscure small cap, I hear you say? Well, 5% of the fund were just the accumulated losses on what started out as a smallish position when he bought them at 80p. Another crap trade).

It's a dangerous market - and for this reason Flash has reintroduced that FTSE short and will look for a Dow short entry point this morning as a hedge against all his longs. It's only gold and the currencies that are keeping him in the money, but the fund has blown up badly in the last couple of days - too much risk, not enough margin - gave up a lot of his gains from the bounce over the weekend.

Less is more - so he's paring back his positions, putting on his tin hat, and holding off from trading. Like most of the rest of the world, unless they're selling. Which means that some serious downside could still be in front of us.