Hello Recession

We officially have a correction on our hands (down 10% in less than two months) and I am highly amused by the whole thing. In fact, I almost snarfed ice water on my keyboard yesterday when I thought of how we got here. Most experts are saying that we are entering a recession, and I agree. We've probably been in one since late summer, although you never know on these things until months down the road when some government bureaucrat puts out the official word.

It's always funny watching the flow of money during volatile times. If most U.S. taxes tend to transfer wealth from rich to poor, then markets like these tend to transfer them back the other way. It is obvious that big commercial banks are getting hammered during this credit crunch. Citi has been chopped nearly in half, and others are doing almost as badly. Goldman, on the other hand, is doing quite well. Either they don't have a sub-prime problem, or they do, but they hide it well and can write down the assets quietly over a period of several quarters to smooth out earnings.

You could see this coming a mile away over the last several years. Why would an entire industry suspend its rules and guidelines to make money in the short-term, only to lose much more than that in the long-term? It's like putting together a portfolio by throwing darts at the stock tables, except all of the good stocks have already been blacked out. Actually, it's worse than that. It's like snarfing ice water a thousand times and thinking it will never hit your keyboard.

This sets up the smart rich folks once again. Anytime there is a firesale situation (and believe me it's coming), they will swoop in just as the blood is spurting out of people's ears and running down the street. They will buy when Time magazine declares the sector dead. And they will make anywhere from 30% to 200% in a short time when things turn around. Remember that they control when it turns, too.

So I expect a trading range environment for a while. Given the strategy we are running here, that will be ideal for us. We don't tend to focus on individual sectors too much, but we may do some cherry-picking shortly. Some are nearing the bottom, others haven't felt the impact yet and have plenty of room to come down.

I am looking at homebuilders, banks, and the VIX very carefully today.