Wednesday, October 22, 2008

What do you think is going on?

This post is not meant as investment advice, it's purpose is to spark some comments and discussion.

What's your opinion on what the market is doing? Why all the volatility? Why the melt down? Why is the US dollar going nuts? What's up with the huge drop in oil? Why are great high dividend yield blue chip stocks taking a hit? Here are my thoughts;

Liquidity seems to be the issue. Investors were, and still are worried that the firm they have their money invested in will go bankrupt, or worse, the firm they have there money in has invested in some other firm that goes bankrupt. Either way your funds would be locked up in a bankruptcy and that's not liquid. This has caused people (or those on wall street) to cash out, stocks, commodities, everything. You never saw this coming did you? Wall street did, that's why there was a huge drop to begin this mess. Read the user groups on the early questions on the put volume of some of those firms that bit the dust. People were trying to figure out if they were buying or selling puts. Looks like they were buying puts and made a huge, huge killing on the firms that went tits up.

Why is gold not going up since it is the safe haven? Cash. Everyone wants cash. The biggest cash nation, rather richest nation is the USA. That's where the credit crunch started. Funds are liquidating investments world wide causing all indexes to fall from the massive selling. Once they sell a stock in a foreign country they must then convert the currency back to USD. The USD is going full tilt in an uptrend. I think you can almost compare currencies to see where the biggest exchange of funds is happening to some extent. In Canada, the oil and commodity prices are also killing us, that impacts the Canadian dollar. Why are the commodities dropping such as metals and gold? Liquidation.

This is going to be a long healing process, not a quick snap back to the market. The volatility is probably due to huge amounts of money being moved around, not the norm for the market. To end this, the mass amounts of cash has to be moved to the US and invested elsewhere.

So what is next?
When the time comes, when all the cash is back at home in the USA, who knows what will move. The first sign will be the indexes stabilize, then slow decline in the USD, then accelerated decline of the USD against the Canadian dollar, oil will rise, and whatever the US giants invest in will rise. If a recession is coming, look for a rise in recession proof stocks. The USD will cease to rise since there will be no more buyers.

What am I going to do? I'm going to try to ride the USD higher. When it snaps the uptrend, short away. But be careful and manage risk. The market will start to settle down and into a trend when the normalcy again, weather its a bear or bull market.

That's my theory. What's yours?

Disclaimer

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