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Mark L Schemper

Tuesday, October 21, 2008

For What It's Worth

I haven't written anything pertaining to investments for quite a while. Then again, I haven't written anything in a while. The purpose of this post is to serve as a mental note to myself. If someone else finds some value in it, consider it a bonus.

Today I allocated 50% of my IRA into equities. The balanced portfolio I maintained in this account was completely liquidated into 100% cash on the week of August 17, 2007, or 14 months ago. Outside of some dubious short-term directional bets and a profitable stint in gold, I've kept 100% of my retirement account in cash, until today. As you can see by the chart, I looked like a complete dolt on the week of October 12, 2007, and I was kicking myself at that time. Obviously, that feeling subsided shortly after.

I used to write posts about now-defunct subprime lenders being on sale given their cheap P/E ratios. That sentiment changed once the shit started hitting the fan in the summer of 2007. I started to reject the overly bullish calls of certain economists (read: Larry Kudlow and his ilk) who proclaimed the subprime lending problem would be limited to the subprime housing market. I saw their claims as spin/damage-control for the idiot President they so adore - they felt Bush was not getting the credit he deserved for the economic expansion - and far from objective analysis. I feared a credit crisis.

My projections differed from what actually played out; I feared a seizure in consumer credit due to careless lending via credit cards, resulting in a recession induced by a sudden drop in consumer spending. I had only been in this industry professionally for two years at this point, and my perspective was skewed toward consumer behavior because I'd been in the consumer market nearly my entire life (I started mowing lawns for money at Age Eight, yo). I didn't realize the extent of the Credit Default Swap market, I could have never predicted a situation where there would be - for a time - no bids in the commercial paper market, and I never thought I'd see negative yields in US government debt. Pure fear and panic. It turned out those unqualified home buyers weren't the only ones borrowing too much. Everyone had too much debt.

So I'm back in equities, half way, and my exposure is entirely in a consumer discretionary ETF. I'm unsure where the market is going from here, but I don't want to completely miss a turnaround. Then again, if another shoe drops - perhaps another exotic instrument like synthetic CDOs will become the next Boogie Man - I don't want to get killed. No one wants to get killed.

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