Thursday, August 30, 2007

All eyes on Uncle Ben

I have to admit that I didn’t expect volatility to return with such a vengeance this week. Nor did I expect CNBC to continue putting up such an array or luminaries, including John Bogle of Vanguard, who were unabashedly calling for a recession. By the way, Bogle thought the likelihood of a recession was 75/25 in favor of having one.

Right now all eyes are on Ben Bernanke and his scheduled speech Friday in Jackson Hole, Wyoming. Personally, I don’t expect much from the speech which is to be given at a pseudo academic conference anyway. I’m also in the minority camp in thinking that the Fed may not cut at their next meeting on September 18, even though I’ve been calling for a “spill over” from housing since the start of this year. It’s just that so far I have actually been impressed by how well Bernanke has stuck to his guns in running a “data dependent” Fed.

So far I’m still looking at a recession in terms of probabilities which basically means that I have taken a hard look at my portfolio and made sure that I have convictions in every position that I intend to keep. In order to raise some cash (in case the $HUI crashes again), I have closed two positions–a small percentage of my overall portfolio.

You’re probably wondering why I have made such minor changes despite sounding dire at times. There are a number of reasons:

  1. I still believe that even if a recession occurs, it would be shallow on account of the global growth story.
  2. Insider buying shows conviction
  3. Sovereign wealth funds and the global symbiosis
  4. Overwhelming negative headline points to limited short-term downside
  5. High VIX and put/call ratio which usually coincide with short-term bottoms

Finally, there are two most important reasons that I’m holding off drastic changes at the moment: I know how to protect myself from a prolonged bear market should one come, and I have sufficient cash reserves to see me through a long period of time. They are the safety nets that keeps me asleep at night.

Best of luck to you.