Looking Ahead

I can see pretty clearly what's happening right now. The long financial/short crack-up-boom trade is reversing (Oil +$4, etc.). I bought a half position in SKF to jump on the bandwagon. I'm tempted to pile on more, but I'm already positioned almost perfectly for more crack-up-boom commodity bubble activity as the shorts take profits and go back to shorting the bounce in financials.

I was looking at shorting FNM again today as yields on FNM bonds rose to 6.08%. The 30-yr mortgage rate is at 6.45%. This will probably rise much higher over the rest of the year, maybe to 7%. This will further depress the housing market. I like my 23% short position in housing, but TOL is too strong. I'm thinking of covering TOL for a short FNM position. However, this might be kind of risky, due to the fact that FNM has fallen back to $7.80 from its short-covering high of $18.85. However, real value is negative. I might do this for a quick trade as the tide turns.

I'm still not sure what to do with my Treasury short. I'm just going to keep it until I make up my mind. One other thing I'm thinking of shorting is WB. They have $200 billion in commercial business loans, half of which they made in the last 5 years. These are souring very quickly: the delinquency rate has jumped from 0.07% a year ago to 0.88% last quarter. That's $1.58 billion over the last year, with huge exponential acceleration. We could easily see this quadruple to 3% and over $5 billion in losses over the next year. This would crush the stock.

My exposure in financials is now - 39%. Long exposure in the form of MCGC and ALD is + 13%.

I'm leveraged pretty much right now, but I see pretty clearly now. Commodities will have one more good bounce which should last a month or two, but it won't reach previous highs (barring some kind of geopolitical shock for oil). Then it will be down, down, down. When commodities resume free-fall, I don't think financials will get much of a bounce.