March Update

Things have developed largely as expected over the past six months. The financial system continues to be in shambles with a new rumored bank failure everyday. Much to everyone's shock we had the failure / bailout of Bear Stearns announced over the weekend. This seems to confirm my negative bias regarding the financial sector and reinforces my expectation that this is a sector to remain short throughout 2008 or at a minimum for the foreseeable future.

We saw a nice rally in some of the more beatup shares today after the Fed rate cut, but I expect any rally to be short lived. The way I see things setting up, it is not too late to short anything related to real estate, banking, or financials. There is some timing involved, and it may be too late to make the trade via put options due to astronomical volatilty / options premiums, but outright shorts should still work. Im considering the following candidates: JPM, LEH, FAF, WFC, RTH, and BBY.

My own trading results have been far from stellar. I botched the execution in the Downey trade and managed to turn at one point a $3,000 paper profit into a $500 realized profit. I had a small gain shorting FAF, but have in turn lost money long FXI, AIG, and WZEN all earlier this year. At the same time, the process has reinforced my belief that we are in the early stages of a bear market. I will do my best not to let my guard down going forward and attempt to open any new positions on the short side for remainder of year.

Commodities, gold, and oil continue to hit new highs. The bear market should accelerate when these sectors finally crack as it will be a strong indication that global growth has slowed, and the old fear - "deflation" is back.

The government has been quite valient in trying to prevent the asset price deflation currently under way in the real estate and credit markets, but have been relatively ineffective, unless you want to congratulate them for slowing the process down to some extent. Bernanke is being put to quite the test. I believe before we reach the end of this bear cycle, he will have tried every trick in the book to try and prevent a Japan or Great Depression style deflation taking hold. Still, the bubble was just too big and I dont expect him to succeed.

So for 2008, stay short, stay skeptical, and don't believe the hype! There are big changes on the horizon - politically and financially. Those who are patient and conserve cash will be most rewarded I expect.

-BG