Back in the Game

Wow!

It seems like forever since I posted. I know my readers probably feel similarly.

What happened, you ask?

The short answers is that both Velocity 2009 and Structure 09 happened. Both of these conferences, geared toward the Internet industry, occurred back to back last week in San Jose and San Francisco, respectively. Being employed in this industry, and extremely interested in the issues these conferences cover, it was imperative that I attend both. Along with, I spent some time working in my company's facility in San Jose, CA, which means that I can now officially claim a tax deduction for the airline flight to San Francisco, partial usage of the very nice rental car I gave myself, and my hotel room.

Unfortunately, my company did not see fit to send me to California to learn how to better serve our customers. Well, because, customers aren't that important anyway when you're a monopoly. You're going to get your pound of flesh one way or another, and 2 pounds on a good day. The tax deductibility of the 2 days I did work takes some of the edge off the fact that I was not fully able to enjoy my trip as a "vacation". I think I'll be returning some time in the near future, and I won't be working when I do.

I was in the Silicon Valley/Bay Area from 18 June until 25 June before taking off to Atlanta for a cousin's wedding. I have to admit, spending time in the Bay Area after such a long time away really made me consider moving back to California. There's just something about the thinking, the ecosystem, the infrastructure which has already been put in place and the people who are part of it. I don't generally like most Californians, but that could have a lot to do with spending so much time in southern California. NoCal and SoCal really are 2 separate states. For example, after Structure 09 concluded, Canaan Partners sponsored the post-event cocktail reception at which I met several very interesting people including Andrew Shafer of Reductive Labs and the great Paul Kredrosky himself. For some reason, this kind of experience only seems likely in Silicon Valley.

While I was gone, my positions in UCO and UNG didn't do too much, but they didn't move against me, which was welcome. I'm still monitoring them closely, probably even more closely now than I had been. The time is approaching when I have to unwind some of these positions. I still like the long term potential for natural gas, and I think oil is an obvious play long term. However, I also think short term technical factors may begin moving against both of these positions shortly.

While I'm at it, if anyone has suggestions for an oil ETF besides UCO, please chime in via the comments. I don't like the fact that UCO is an ultra (2x) ETF, for well known reasons. I want something with better characteristics and less inherent risk.

Anyway, that's what I did on my summer vacation. In the coming days, I plan to write a bit about some of what I did, as well as give my quarterly recap on my personal finances and goal achievement. 2Q2009 wasn't too bad on either front, and with a few tweaks to my debt payment plan, I think I'll be able to achieve my ultimate debt goal for the year.

Stay tuned, and thanks for sticking with me!

Selling Out

Yep, I did it.

I sold 60% of my position in UCO to lock in my gains. With the exception of $500, I've taken out my entire investment of $5500 (approximately). My remaining position would have to see UCO hit $2.50 in order to wipe me out. From here on, it's all profit. Having a smaller position in UCO is reassuring, as I now have some capital to deploy in other interesting ways, including possibly buying back into UCO or other oil related investments.

I still think the overall direction for the markets is down, at least from this point. How much further down and for how long are questions I don't have answers to. So getting out during yesterday's downdraft was fine by me. I really should have had a selling plan together, but I've been preparing for a trip to San Francisco and have been distracted by the details. Watching the European and pre-market US action yesterday was a wake up call!

So what's next? I have no idea. This money is my original investment, so the search is on for a worthy vehicle. My broker will be lifting day trading and margin restrictions on my account next Wednesday (hopefully) so that is very welcome. For now though, I feel like trading on a 3 - 12 month timeframe. I guess it's time to do some research. I really wish I could do equity options trading though. Certain things would be so much easier. Oh well. *shrug*

:)

Until next time...

Too Big to Fail or Unwind

Short US Treasuries and Long US Treasury CDS FTW!

Okie, I go now...

How Dasan Is Investing Now

Those of you who follow the hardcore investors and finance types on Twitter will recognize the name Dasan. A very sharp and witty guy who manages a portfolio at an unnamed hedge fund, Dasan recently published an analysis of how he is currently investing and how his investment process works. Fascinating reading from an investment professional. Check it out!

Stopped Short

I mentioned in my last post that I was stopped out on UGA. Total bummer really, but that's also the point. While the loss would have been temporary, I now have capital to re-deploy elsewhere.

So what happened, you say?

I entered this 100 share position at on 19 March 2009 at $24.82. I went light because I didn't have a lot of capital to deploy, and I really haven't like the price point on UGA. Basically, for investing in the oil patch, I get more value elsewhere.

My stop was filled at $29.26, for a per share price, after commission, of $29.19. My stop was placed at $29.25, which I thought was loose enough to prevent all but the most egregious of downdrafts based on UGA's trading history. Clearly, it should have been a bit looser.

Profit, after commission, came to 17.6%. Not too bad for a 2 month holding period. While I would have loved to continue holding UGA, I have been able to pursue some other ideas with the freed capital. So things eventually work out. I have no interest in chasing UGA on the way up, even though I think it has a bit further to run. I'd rather deploy capital in more efficient ways and focus on getting a 2 or 3 bagger, if not more.

Remember, cut those losses short. But there is nothing wrong with taking a profit. Just don't take them too aggressively. Always let your winners run if you can.

Until next time...

Ooops!

Actually, it was more like "damn!!" but you get the picture.

That's what I said on Wednesday when I pulled the trigger on a trade. Why did I curse my trade? Because I'd selected a limit order instead of a stop, and in short order, 1/6th of my holdings of UCO were gone at a price of $10.54 per share.

Let me clear. I'm not upset because I made a profit. It's kind of hard (and stupid) to be mad about that outcome. I am mad because my profit was only $1.99 per share, with an entry of $8.40 for those shares (on margin). So, if we do the math and subtract $14.00 in commissions, my gross profit was 23.67%. Not bad for a position entered on 31 March. Of course, none of this includes tax calculations, but I have enough previous losses to offset the small amount of taxes here. I've also not subtracted margin expenses, and if I can get clarity on that point, I'll update this post or post anew.

Still, my net profit works out to be about 14 - 15% over 7 weeks, or 104 - 111% annualized. Not too shabby. Now to wash, rinse and repeat!

So in the future, I warn everyone to make sure that you set the trade type appropriately with your online brokers! Don't be like me. Don't give up profits early with stupid mistakes.

NOTE: We'll discuss getting stopped out of UGA the following day in a later post.

Happy trading!

Exogenous Price Shocks

It could just be me, but what I found to be most interesting in the 20 May post from David Kotok of Cumberland Advisors was the story about corn ethanol and its effect on "food insecurity" in Zambia (and by extension, around the world). 2,500,000,000 affected by bad US policy on corn ethanol. Brilliant!

My only question is how can I benefit without trading in corn on the CME? Trading grain futures and options on them handed me my own head once. There may not be a clear path to profitability for the small speculator, but I plan to keep looking. I'm all for capitalizing on bad public policy.

That's all for now. Until next time...

Canary Red

This quick blurb about HSBC over at Bloomberg.com caught my eye. Why? Because for those who recall early 2007, HSBC was the first major bank to admit any problems with its subprime portfolio. We know how the rest of that year progressed. I have to wonder if they are leading the pack again. I guess only time will tell, but it is definitely something to keep an eye on.

Could that be the stench of death around the financials, yet again? Hmmm. I know my choice for leading contender to die.

Until next time, good people, stay safe...

Peter Thiel on Financial Markets and The Singularity

I will definitely watch this again, but a few things struck me about this presentation by Peter Thiel. (For the unaware, Thiel was the CEO of PayPal who sold the company to eBay. He runs Clarium Capital Management LLC, a global macro hedge fund, and does early stage investing, mostly through The Founder's Fund. He was one of the first investors in Facebook and a bunch of other well known Web 2.0 companies.)

First, Thiel really is nerdier than I expected. I was hoping there was a suaveness to him, a relaxed confidence borne of his intelligence and success both as an entrepreneur, an academic and an investor. No. There really isn't. He's as nerdy looking and sounding as one would expect from reading about him. I'm not sure what to make of this, and it really means ABSOLUTELY NOTHING, but it caught me off guard. He's also a very unpolished speaker. Again, this is not a problem or a bad thing, but I always find it difficult to listen to people who overuse "ummm" and "uhhh" and "you know" in their speech. In Thiel's case, it is probably a matter of his thinking faster than he speaks, and his speech having to catch up with this (disorganized and chaotic) thoughts. However, it only serves to obfuscate his message and, to me personally, makes it almost painful to listen to him. He should probably spend more time preparing and organizing his thoughts when he is to speak to crowds.

Second, I think Thiel has misunderstood Warren Buffett's investing strategy. Maybe Buffett, and by extension Berkshire Hathaway, has invested in The Singularity better than anyone else. However, I don't think that was his objective. Buffett and Berkshire have been doing the very logical thing - managing risks and probabilities. Insurance is the ultimate business of managing risks and probabilities. The insurance business is basically about probability, and this fits with Thiel's singularity thesis because it comes down to managing the fat tail risks.

Thiel makes the point, several times, that there are all of these potential outcomes in a non-Gaussian distribution of risks, from -- for example -- an investment boom being the beginning of "The New New Thing" which will revolutionize life on Earth to just being an extended investment mania. He uses the Japan bubble of the 1980s, the Internet bubble of the late 1990s, the real estate bubble in the US in the early part of this decade and the pursuit of the control of space in the late 1960s as is representative cases. In most of these cases, there was a span of time during which great wealth (or "wealth") was created, followed by a spectacular collapse -- boom and bust.

Thiel continues on to mention that Buffett, by way of Berkshire Hathaway, is investing in the The Singularity by writing insurance against catastrophic events -- the busts. However, I think Thiel has missed some things. First, Berkshire is not new to the insurance business. Second, insurance -- basically, writing puts against given outcomes, which I think of as the best description -- is a well known business with solid underpinnings. Buffett understands this, and uses this to his advantage. The Berkshire insurance businesses are cash generators, and Buffett has intentionally steered away from certain lines, or approached them carefully. For example, Geico only recently began writing renter's and home owner's insurance, after having been in the auto insurance business for a long time. Geico has also been known as the company that would only take on the best drivers (e.g. the lowest risk drivers) and dropping coverage for drivers after a single accident (cutting losses early). The cash thrown off by the Berkshire insurance businesses has fueled Berkshire's acquisitions of other lowly valued businesses (on a fundamental basis) as well as it's war chest, which in turn had driven it's AAA credit rating (until recently).

Even Warren Buffett's mistimed (?) derivatives bets are nothing more than insurance plays. They are bets on the probability of certain outcomes, including the level of the S&P 500 equity index in almost 20 years. While the positions are underwater now, and Buffett can be considered hypocritical for calling derivatives of all stripes "financial weapons of mass destruction", he is fundamentally making similar bets as any of the insurance lines his companies write.

I say all of this to say that Buffett doesn't invest in insurance businesses due to some recognition of or belief in The Singularity but simply because he recognizes that probability is on his side. Everything has risk, but insurance, such as it is (outside of the realm of catastrophe, for example), is well known and generally a cash cow due to the small payout in claims against the large revenue in premiums. Maybe Thiel knows this, but he seems to express a view that Buffett has some grandiose "black swan" perspective on investing. I, personally, think not.

Anyway, it is an interesting presentation and not a bad way to spend 20 minutes of your time. Will you gain any new insight here? Probably not. But you never know. Maybe something he says will land with you in a way other talks have not. Check it out if you have the time.

Until next time...

Eric Rosenfeld Lecture about LTCM

If you haven't yet caught it, you should run - don't walk - over to Zero Hedge and check out this approximately 90 minute video of Eric Rosenfeld giving a lecture about the LTCM collapse back in 1998. Fascinating insider's view. The comments over at Zero Hedge, as expected, are acerbic but many are enlightening and worth a read.

I know I will be revisiting this again shortly, as I found the entire lecture interesting. While I'm sure Rosenfeld mixes and mis-uses some vocabulary and concepts, all in all I think there are definite lessons here. The biggest, of course, as we've learned in the last 2 years, is that in times of stress, all correlations go to 1. However, I want to reconsider the endogenous risks that Tyler @ Zero Hedge mentions. I'll definitely watch this again soon, maybe after my nap this morning.

I think the leverage factor, which has been widely associated with the LTCM implosion, bears added consideration. Recently, Accrued Interest made the point that leverage isn't what kills; bad investments kill. Clearly, this is true. However, leverage has the force multiplier effect and can transfer an innocuous loss into a catastrophe. Eric's lecture covers what he calls the 10 biggest myths and misconceptions about LTCM, and yes, they did hit 300x leverage at various points, according to him. However, it did not occur for the reasons you might have suspected. It adds a bit more color to the whole conversation. I know that, in my own mind, I vilified LTCM for such egregious use of leverage. Seems I was mistaken.

Finally, we're all familiar with the idea of prime brokerages frontrunning their hedge fund clients. As I think I have previously mentioned, I think there may be an opportunity for a 3rd party prime brokerage business to emerge, or even for trustees and custodial banks to subtly move into the space. State Street and Bank of New York Mellon are the obvious candidates, as they already have large custodial and administration businesses, so why not move up the value chain and entrench yourself further with you customers (for additional fees, of course). However, there's a startup opportunity in there too, I believe.

Anyway, go check it out. Good stuff for us finance geeks, anyway.

Until next time...

The Hidden Risks of a Central Counterparty in CDSland

If you didn't catch it yesterday, FT.com's Alphaville had a great piece about why a central CDS (credit default swap) counterparty (read: exchange or clearinghouse) might not work as well as everyone thinks it would. While I still think it necessary, it's obvious that the idea needs work. Specifically, it needs to be integrated with existing clearinghouses/central counterparties to make sure that cross-exposures are appropriately netted.

The piece also raises the point that CDS account for only 11% of the OTC (over the counter, or dealer-to-dealer) derivatives market.

Again, putting CDS trading on an exchange or other central counterparty is important, but at most only 40% of trades might move to such a central counterparty. CDS are not standardized, and standardization removes profit which is why B/Ds are loathe to do it. It needs to be done though, to bring as much of the shadow banking system into the light (along with many other moves, however, like re-splitting commercial and investment banks a la Glass-Steagall, as I previously mentioned). The more trades in a central location, the better. There will always be OTC trading, but it should be for the most esoteric and specialized -- and hopefully rare -- trades.

Trading Report: Risk Management

This report will describe the lessons learned from my experience trading DXO, the PowerShares DB Crude Oil Double Long ETN (exchange traded note). Hopefully my experiences will serve as a warning and a guideline to those of you reading this. We should always seek to learn from our mistakes, and to make new ones as opposed to making the same ones repeatedly.

After my previous experience trading DXO, I figured I could use it as a vehicle for some trading gains. I believe in the long term thesis around commodities, and oil in particular. I think that $200 oil and $5 gasoline are eventualities in the US. I chose DXO as the vehicle because of its extremely low price and embedded leverage, making it, as @marketfolly remarked "a call option on oil". Nice!

The problems with this particular idea were manifold. First, DXO is an exchange traded note as opposed to being an exchange traded fund. If, for some reason, the sponsor were to go bankrupt or some other restructuring, the holder of DXO becomes an unsecured creditor of the sponsor. That adds counterparty and credit risk to the inherent market risk. Over on the Market Folly blog, there was a guest post by @tradefast which covered some of the details of trading oil via ETFs and ETNs, including the counterparty risk issues. That guest post is a must read!

The next problem is that DXO is a double long ETN. It seeks to replicate 2x the movement of its underlying index. For example, if the index moves 1% up on a given trading day, DXO should move 2%. Thankfully, in the case of DXO, this calculation is done on a monthly basis as opposed to daily, making DXO slightly less volatile than it could otherwise be.

My first, and probably biggest, mistake in wielding DXO as a trading vehicle was to not use stops. I really have no excuse for such an egregiously stupid act, and the market punished me accordingly. Generally, my stops on DXO ended up being far too tight, and I would get stopped out much sooner than I really had a tolerance for. Either that or I would get stopped out right before a bottom. While setting proper stops on DXO is difficult due to the high volatility, at least having them in place would have (possibly) prevented the $6000 meltdown that I experienced.

The second problem I introduced was using bad position sizing. This may be the most critical failure. Given the price range DXO was trading in at the time (January - mid February 2009), I accumulated a sizable block of shares, somewhere in the neighborhood of 6000. This represented at least 50% and probably closer to 60% of the assets in my brokerage account. What's even worse, I had this oversize position on a security which essentially acted as a call option! This increased the overall volatility of my portfolio and created more stress than anything. It was a completely irresponsible action on my part.

My third problem was failing to construct a proper trading plan."Plan your work, work your plan." Simple, right? Not if you don't create the plan! I was trading DXO by the seat of my pants, and thus, by emotion instead of trading it in accordance with the plan I constructed. This caused me to buy at bad times, sell at bad times, and generally overtrade. Overtrading is the quickest way to deplete your funds, it seems to me. But the biggest issue with failing to construct a proper trading plan - and adhere to it - was being swept up in the daily volatility and gyrations of DXO. For a security that moves as violently as DXO, with built-in leverage to boot, you absolutely must have resolve in your idea. If the facts change enough to warrant getting out of the trade, then so be it. All of that is testable against your plan, however. If the market conditions, when compared to the plan, tell you not to do anything, then you don't. If they do, then you do. The trading plans adds clarity, focus and structure to what can easily spiral out of control into a emotional quagmire.

So, all of that said, what practices can be put into place to prevent these mistakes from recurring?

First, creating a trading journal is a must. Dr. Brett Steenbarger talks about this here. There's really nothing more for me to say on the topic.

Second, no day or swing trades will be undertaken without an accompanying trading plan. Long(er) term position trades or investments (12+ month time horizons) won't require this level of detail to enter the position. There would be nothing wrong with doing so, though. The trading plan is a tool to enforce discipline in the face of emotion. Since the emotion, for me, is a much stronger factor when dealing with the short term trades, I will focus on optimizing my routines for those cases first.

Third, I have created a new rule that any trade, long or short, will be made with an accompanying stop/loss order set. Discipline is required to keep up with this one, at least until I change to a new broker. My current online broker (who shall remain nameless to protect the guilty) sucks but there's little I can do about that at the moment.

I may delve further into this topic and the specific actions I took that led to this point. Deconstructing them may be instructional. But for now, I hope this analysis is interesting and useful to someone.

Until next time...

Goal Status and Updates - 1Q2009

The first quarter was a bit of a mixed bag. On one goals, I exceeded anything I could have imagined possible. All of the others were failures, at varying levels. :( Anyway, now I have some things to refocus on for Q2.

Business: Finish writing e-book by 9 Jan 2009. Publish by 16 Jan 2009. FAIL.
Business: Make 3 contacts during Money:Tech 2009 (6 Feb 2009).
Personal: Ride a blue trail by 31 March 2009. FAIL.
Professional: Find and accept an offer for an awesome new career opportunity by 31 March 2009 (end of 1Q2009). FAIL.
Fitness: Achieve 10% body fat by 31 Mar 2009 (end of 1Q2009). SURPASSED.
Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 1Q2009). FAIL.

So let's break these down quickly. Money:Tech 2009 was canceled, somewhat unceremoniously, by O'Reilly. So there was no way I was going to accomplish that goal, even though I had my registration in order and was seeking a place to stay for those days when I was informed of the cancellation.

I am moving my "ride a blue trail" goal to the end of the year. I thought I'd ridden a blue trail at Whitetail on my last trip there, but it turned out to be a green. So I decided to take a break to refresh before tackling a real blue. Well, like an idiot, I ended up riding another green 2 or 3 more times (because it was just so fun, and the conditions at season end were amazingly good). Those runs totally crushed my legs, though. I should have just ridden the blue first, but by riding the green, I totally subverted the achievement of my own goal. It just goes to show that most of the time, you just get in your own way in life. :\

I'm still not sure if I will finish the e-book. The economic/financial crisis has been dissected to death, and there will be tons more in the future. This crisis is on its way to be becoming a Harvard Business School case study! So, although my e-book sought to be comprehensive in explaining the crisis as well as delving into practical solutions for real people to survive, thrive and prosper through it's aftermath, I don't know if I can do better than what has already come out. (Or will come out in the future.) I may still do it, just for my own personal edification, but I'm unsure at this point.

With my goal of 25 dips, I came close but as my father is fond of saying, "close only counts in hand grenades and horseshoes". During my workout, I normally do sets of 15 reps of dips, but I was (until recently) doing 6 sets. That works out to 90 dips over the course of a session. So I thought the 25 in a row would be easy to do. Man, was I ever wrong! I failed at rep 17, then again at rep 22. Since I did not make it straight through, I am calling this a FAIL even though the definition of success is my own. I could rightfully call it a pass, since I did get all 25 dips. I'll move this goal to later in the year as well, and spend more time preparing.

My 10% body fat goal was my only success, but given the rather aggressive fitness goals I set, it is amazing that I reached it when I did. Actually, I made it to 8.4% body fat before the end of January, IIRC. It definitely was measured before the end of February. If you look at my original 2009 goals list, the date by which to achieve 8% body fat was 31 December. So I basically crushed this goal, and almost achieved my annual goal before the end of the Q1. I can see my sixpack coming into focus, and I haven't even gotten serious about sculpting my body yet. Talk about inspiring!

Finally, I did not find a new career opportunity. Not even close. I dither on whether to continue pursuing this goal at this time. I have other projects I would like to spend more time on, and my job suits my lifestyle perfectly well. While it often annoys the hell out of me, it's an easy job, with a solid company, decent benefits, amazing hours, and I work with people I generally like doing something I generally like. The only real problems are that I think the organization is misguided and confused, and management above my direct manager is ineffective and highly politicized.

*sigh*

Time to get to work!

Here's my updated list of goals for the remainder of this year:

Personal: Cook 1 meal per week by 30 Jun 2009 (end of 2Q2009).
Business: Finish unwinding my real estate partnership by 30 Jun 2009 (end of 2Q2009).
Fitness: 1 hr of cardio on the Precor EFX 556 in interval mode by 30 Jun 2009 (end of 2Q2009).
Fitness: 10 wide grip pull ups, full body weight, by 30 Jun 2009 (end of 2Q2009).
Fitness: 25 dips, full extension, full body weight by 31 Mar 2009 (end of 2Q2009).
Personal: Save $15,000 for house down payment by 30 Sep 2009 (end of 3Q2009).
Personal: Read 1 book per month (12 total) by 31 Dec 2009.
Personal: Accumulate $30,000 in emergency funds by 31 Dec 2009.
Personal: Achieve $90,000 in net worth by 31 Dec 2009.
Personal: Pay AmEx down to $0.00 by 31 Dec 2009.
Personal: Ride a blue trail by 31 March 2009.

Stretch:

Fitness: Achieve a visible sixpack by 30 Sep 2009 (end of 3Q2009).
Personal: Achieve $150,000 in net worth by 31 Dec 2009.
Personal: Read 1 book per week (52 total) by 31 Dec 2009.
Fitness: Achieve 8% body fat by 31 Dec 2009.
Fitness: Chest press 200 lbs for 15 reps by 31 Dec 2009.
Fitness: 1 hr of cardio on Precor EFX 556 in hill climb mode by 31 Dec 2009.
Personal: Accumulate $50,000 in emergency funds by 31 Dec 2009.

Until next time...

The Missing Man

So I was reading some of the commentary about the new Geithner plan, and the one thing that struck me (particularly as I read this) is that we still haven't see anything cogent about the valuation of these "troubled assets".

At the end of the day, I think the banks ARE currently insolvent BUT I think they can survive this. The key will be getting those assets off their books. YES, they will be insolvent. Get over it. As Steve Randy Waldman said over at Interfluidity the other day, they were insolvent before, during the S&L crisis. Insolvency isn't the issue. A few years of reasonable earnings w/o dividend payouts and public markets recapitalization -- as James Surowiecki has advocated (see the Interfluidity post for the links to Surowiecki) -- and I think many (not all) of the current banks survive in some form. Obviously, the industry will see huge structural changes in other ways, but overall, I don't think we risk losing too many of the existing banks. Yes, the banking system needs to be fundamentally overhauled, and personally, I think Glass-Steagall needs to make a return, but that's a conversation for another day.

Aside: The ones I think we DO lose would appear to be interesting shorts. :) Figuring out those names is left as an exercise to the reader. That's what the comments are for! I'll start with WFC.

What worries me most is whether Geithner's new plan will attempt to do what Hank Paulson's original plan(s) attempted to do - bailout the banks with unrealistic valuations of these assets. I don't think too many private investors will be interested in overpaying to take these assets off the balance sheets of the banks. I know I wouldn't be interested in overpaying for distressed assets. The marks they carry are because they are distressed! So I am particularly curious to see when and how this question is answered. If anyone out there reading has anything to share, speculation or otherwise, please do share!

I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what Upside would call a Wile E. Coyote moment, not realizing there's no ground underfoot but still running. If this question isn't answered well AND soon, gravity kicks in with a vengeance! Of course, that's not to say that gravity won't kick in just because. It is "The Market" after all.

Finally, realize that I am only speaking about this plan right now. So many people seem to have forgotten about the BIG elephant in the room, the REAL missing man. There will be a next leg down, I'm fairly certain. And the banks will continue to be insolvent. Whether that turns into a liquidity problem is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.

Until next time...

UPDATE: Looks like I spoke a bit too soon, but still, I personally want more detail.

Random Thought

Sounds like portfolio insurance all over again, at least to me. This gave me a good laugh. Liquidations like this, across asset classes, are happening the world 'round.

*shrug*

Trading the 401(k)

There are plenty of reasons NOT to do this, but I would expect that many personal finance bloggers do so to some degree. Definitely not all, but the number is surely non-zero. Even respected professionals such as Teresa Lo advise against it for most people. However, the opportunity is just too good to pass up. This is the first of potentially many instances in which I plan to do this over the coming years.

To start, due to the almost 20% bounce off recent market lows, my 401(k) is has gained slightly over $5000 in value. Not a huge amount, true, but hardly non-trivial. So it seemed like a good time to lock in some of these gains. I am a believe that we have not seem the bottom of this bear market, and this is simply a violent bear market rally. As well, the numbers I've seen in my 401(k) strongly suggest that to me.

I started by rebalancing completely out of my employer's equity fund. I have been greatly disturbed that my employer pays 401(k) contributions as equity. I already draw my paycheck from this company. Being doubly long by holding such a significant amount of equity (about 6.37% of the total value of the account) on top of my income is a worrisome state. Thankfully, I was able to sell all of my current holdings, which are up 10.7% since the last time I updated my asset allocation spreadsheet. Future contributions will still be made in stock, but this I can't stop so there's no sense in worrying about it.

Next, I liquidated all holdings, both equity and fixed income. With the exception of the bond funds, all of the holdings are up double digits in the last few weeks. (I last updated my spreadsheet earlier this month.) I think a decline is imminent across most equity markets worldwide, and I want to accumulate as much dry powder as possible for future deployment. Hopefully, I will lock in significant gains and more importantly, avoid the downside after this rally fizzles out.

For the record, the holdings in my 401(k) were up as follows: US small cap equities up 16.66%; emerging market equities up 13.06%; international mid-cap equities up 12.38%; US large cap equities up 15.39%; US large cap equity index up 14.85%; international large cap equity index up 16.57%; US real estate up 20.27%.

Anyway, we'll see how this works out. I don't anticipate significant upside movement on any of my holdings, and if I'm able to avoid the next leg down, then I'll have the resources to acquire even larger blocks of shares on the way back up. Mind you, I think it will be a long way back up, several years in the making, but I'd like to take a value investing approach to this, while exercising some downside risk mitigation.

Wish me luck!

Yielding to Logic

That's what I have done with my latest transfer of funds.

How so?

Some of you will recall a plan I outlined almost exactly one year ago. That plan involved paying off my AmEx at a slower rate while I amassed my emergency savings. Now I am ending that plan and focusing on reducing the balance on my card.

So you may be asking what has changed since then?

First and foremost, I achieved my savings goal for 2008. I currently have $20,142 in emergency funds. While I will not completely terminate my Direct Deposit into that account, I am turning down the savings rate to about $150/month from $1000. The remaining funds will be divided among a savings account for travel expenses and for paying down my card.

Second, the return of principal I expected last year never materialized. Thus, due to fees, the AmEx balance has grown much faster than I originally expected or intended. That was a failure of management on my part. I needed to pay closer attention to this situation, and adjust my plan as soon as the payment clearly was not going to be made. This mistake is a learning experience and will not be repeated.

Third, as will soon be detailed, my trading adventures recently have been a less successful than expected. Thus, paying off the card has a higher ROI than shorting AXP or riding the volatility of FAZ. (I have been positive on my AXP shorts, but I haven't had the funds to control enough shares to make huge returns. FAZ, on the other hand, has stopped me out more times than I care to count.)

Fourth is the emotional and psychological component. In the year since that last blog post, the balance on the AmEx has grown pretty steadily. Even after I moved to my current apartment and stopped paying my rent on my card, I just have not been able to pay down the balance as quickly as originally anticipated. That outstanding balance is an albatross around my net worth. At this point, with other goals accomplished, it is now time to address this situation. As I previously mentioned, money is an emotional topic, and how each of us manages our finances is very personal. This charge card balance has finally reached a point of personal pain for me, and now is the time for salve.

By transferring out of my investment account so that I can use the funds to pay down the AmEx balance. While once upon a time, I had it under control, it has become abundantly clear that I am doing more harm than good but allowing this balance to continue living. The rate at which it is accumulating interest is overwhelming my ability to service the debt at a level I feel comfortable with. (To be sure, I could continue doing what I am doing, and technically it would not be hard, but I hate the feelings associated with it. Psychosomatic? Probably.)

Fifth, having a written goal to pay off the card has focused my mind. While it will not be a simple process, if I am going to achieve this goal by year end, I have to commit myself to it. That means doing everything I can to allocate the necessary funds. Some of that will likely come from additional income. Some of those funds will come from re-allocating income from my job, and part of it will come from reducing the balance against which fees are assessed. No matter how this comes together, I MUST perform activities which support this goal given its importance to me.

I have already transferred half of my cash balance from my trading account back into my checking account. From there, it will be applied against my AmEx balance; that transaction should complete today, Friday, 20 March 2009. Along with the coming shift to reduced savings, I estimate that I should have this card paid down before the end of August. I think I can probably be even more aggressive, but there's no sense in creating suffering just to serve a goal. This single payment will reduce my outstanding balance by 46%.

On top of re-arranging my income stream to pay down the card, there are a few places where "found money" comes into play. I have a 5 year, $1000 CD coming due this month. When it does, I will transfer those funds into my checking account and then make an additional payment to my AmEx. I also expect to be repaid about $1600 that I lent to a friend last year. That money can either augment the savings I am assembling for travel spending later this year or, depending on the potential cost of those trips, I may just apply the money to the AmEx.

A bonus to this entire scenario is that I will probably earn enough Membership Rewards points to pay for at least one of the flights I am preparing for. That takes some of the edge off of the pain of scraping together the almost $22,000 that I owe. That alone is a huge win.

Anyway, that's the plan which has been put into action. I'll keep you updated on the progress.

Until next time...