The Upside Down Street and Risk Management

The financial world has changed rather quickly of late. Equity indices from all over the world have collapsed and capital has fled to US treasuries. As an example the 3 Month TBill Yielded 0.05% at the close of trading yesterday. The day prior the yield on the 3 Month T-Bill was at 1.50%. Money was leaving all instruments and running to the 3 Month Tbill. According to the WSJ that 0.05% yield was the lowest since the 1950s.

I hope that the readers out there are finding ways to survive. The only advice I wish to give at the moment as far as trading or investing is that Risk Management has to be the highest priority right now. Cutting losses and keeping position sizes small enough that even if a large percentage loss were to occur that it does not damage your portfolio or trading account too much.

Live to fight another day is really the motto to go by right now. Heroes are not made in markets like this. Be a hero today with a large position size might work out, but eventually a large position size will back fire and may even be catastrophic. This point cannot be stressed enough as those who survive this massive down turn will be either very lucky or very good at risk management.

The World Is In Recession

The US entered recession in November 2007 as the recently revised GDP data showed US growth declining during Q4. Germany's output recently declined. Japan GDP declined from the most recently released data. A large question remains - What happens to Chinese growth in the face of these headwinds? Can Chinese growth "carry" the world away from recession? This remains to be seen. But from where I sit most of the world is now in recession.

Credit

We are in the early stages of a credit maelstrom. The credit storm will continue moving through the world's economies creating difficulties in ways that are unforeseen at the moment. Last week it was some of the auto companies getting rid of auto leases as a means of financing vehicles. This morning on the CNBC news ticker I saw that Wachovia will no longer underwrite certain types of student loans. What will be next?

Equities

Ouch

The Fed

The Fed may be forced to raise interest rates to fight the rise in commodities. Just like the Fed was forced to slash rates to save the banking system the Fed may be forced to raise rates to keep commodities in check. The Fed may go back and forth between saving the banking system and to squashing commodity inflation. Depending on the month the Fed may move to the area that is more troublesome. Sort of like a fire department with limited resources that is forced to put out too many fires at the same time. It will move to whichever fire is strongest at the moment. This is just my opinion. I have taken this view because of the move commodities have had ever since the Fed has cut rates. We will see what the Fed does tomorrow. What a tough job.

US Equities Year To Date

From Yahoo Finance. As of the close of trading on Monday June 16th 2008:

Dow = 12,269.08, YTD = -7.51%

S and P 500 = 1,360.14, YTD = -7.37%

Nasdaq = 2,474.78, YTD = -6.69%

Jim McKay

I was saddened to hear that Jim McKay died over the weekend. In the 70s and 80s I grew up watching him broadcast the TV show Wide World of Sports on Saturday afternoons. Wide World of Sports covered all types of sporting event including some of the most exotic events from all over the world. The program was very entertaining and his announcing abilities made the broadcast that much better. He was one of the great ones.