Friday, May 8, 2009

Mediocristan or Extremistan?

In his book The Black Swan, Nassim Taleb refers to the two worlds above. Mediocristan encompasses the vast majority of bankers and traders, who mistakenly believe that their success is tied into some sort of patterned knowledge and "intuitiveness" of markets, never believing that their success is purely luck. Then Bear Stearns fails and all of their gains for the past 100 years are wiped out.

In Extremistan, seemingly unthinkable events play out with huge banks failing, stock markets crashing, and the U.S. running debt levels to that of a third world country.

I mention these because we made two trades that at least doubled our money over the last 10 days and a third that made us a nice profit in one day. Citi soared at the open yesterday before plummeting back to $3.50 at one point, and Fifth Third went from $3.70 to the mid-$6s (Dr. Mike predicted BAC would be the most volatile player under the stress test charade and with futures leaning towards $15, his call is looking excellent). FAZ soared after the initial bank run yesterday, and $6 calls at 10 A.M. doubled your money by 2. So, my "if you can't beat em', join em'" theory proved to be dead on, and thankfully, both of my brothers and Anonymous joined us for the ride. But my brother insisted on asking the question, "are we still in Mediocristan, a.k.a. did we just get lucky," and it's a good one.

I would argue yes and no. The results of the stress tests proved entirely predictable, and as my other brother pointed out, seemed "choreographed." Sources close to the banks kept leaking out possible results which turned out to be incredibly accurate. Geithner chimed in a few times, stating results would be "reassuring." So no, the actual results were certainly no black swan event. But I would argue that our government being forced through public outrage to conduct the charade of putting our banks through a test, an industry that has internal and external regulators, may be an event we might never see again. Once that mechanism was put in place, the outcome was inevitable.

So now we are stuck in no man's land. The sigh of relief has come, but everyone knows the tests were useless. Unemployment rose to 8.9% this morning. Gold and oil are climbing rapidly, not only on tepid recovery optimism, but belief in inflation. As oil head back towards $60 and unemployment coasts towards 10%, anybody still believe in this rally? I don't, but with the SEC still holding onto their no short card, I'm biding my time in commodities and watching Build-a-Bear head back to $4.


Tiger Coach said...


Remember, the analysts who called bottom all the way down to 6,500 are now calling top all the way back to 15,000. Without a significant catalyst to buoy this rally, we may be looking a slide... a test... and that is when the short card will be played.

Geithner will place his entire wager on the banking system as "the" engine of stability and growth. And will gladly accommodate their success in any way shape or form...

Still there is a lingering specter as to "Who can you Trust?" when it comes to the financials.

***Should an inflation play be the model of choice, (and all signs are pointing that direction) then we can easily see a market of 20,000 within a year or two... Next to the DOLLAR, EQUITIES will be pumped with enough hydrogen to reach the ozone layer. But remember, the Hidenberg was filed with Hydrogen. I believe this mark can turn on a dime.***

Regardless, a good profit for you and the family. While firmly entrenched in the short side of the market, you were able to see opportunity. And that my friend is the reason we play this game.

AX said...

Thanks, TC, but we're not done yet, working on a new hedge idea, will email you over the weekend.