Economaton

Financial pain is lasting longer than I thought. I’m reducing my bets. I sold Merrill Lynch and Lehman and MBI and Citibank today, and I’m buying more IYT - an ETF tracking the Dow Jones Transportation average. IYT has been stunningly resilient lately in the face of high oil prices and a stagnating economy.

I also took a bet on AAPL to drop via a long put. Check out the chart. There’s a resistance zone at roughly 160, marked by the brief consolidation before January’s MacWorld selloff, by the Nov ‘07 bottom, and less strongly by the Oct ‘07 bottom / consolidation zone. Last week, AAPL bounced off of that resistance and made a nearly perfect shooting star formation on good volume at resistance. We’re snagging a bit on a minor consolidation zone from a few weeks back today, but I’m not worried. I plan to hold this put at least through earnings on the 23rd. I expect that sales of the MacBook Air will underwhelm in the thinning economy, just as its presentation at MacWorld did.

I should note again that risk management seems to be absolutely key. Though I was pretty sure of myself when I made the call on financials, I didn’t dive headlong into it, I bought a few shares here and there to test the waters first. As it turns out, conditions were worse than I expected, and I can now get out without serious damage to my account.

WFR, MEMC Electronic Materials, is also on my radar. I was looking into solar energy and alternative energy in general, as I believe reliance on fossil fuels is unsustainable. The solar panel industry seems to be pretty cutthroat right now, though, and half of the manufacturers are in China, where they don’t have to comply with the labor, environmental, and antitrust standards of the United States. I imagine 75% of the solar manufacturers will be gone in 5 to 7 years, but I don’t know which ones, and I don’t have the cash to bet on all of them (apart from ETFs.) WFR manufactures raw materials used to make solar panels, rather than the final product. This should let them survive and prosper even as the end-line manufacturers take each other out. They’ve recently had a 20% loss of capacity at one of their plants, which has depressed their stock. If it’s not permanent, and I see no reason to think it will be, they should bounce nicely when that is taken care of.

The biggest risk in the short term is oil — alt-energy value seems to correlate highly with oil value. When oil is expensive, people (irrationally) assume that the high prices will continue and put money into alternative energy stocks. When oil drops, they then assume that cheap oil is here to stay and so alt-energy won’t be economically competitive, so they sell. Over the long term, I am going to slowly build a position in alt-energy companies I think are strong by buying on such dips. The problem is that we don’t know for sure when the oil lows are, except retroactively…. So I’m just going to spread my bets and split the difference.

Sirius Satellite Radio and the XM merger… I picked up some SIRI calls for a song last August, and I’ve been adding to them slowly. I’m hoping for a big bounce once they finally wade through the bureaucratic morass and get the deal approved. I was rather surprised that there was no such bounce when the Justice Department cleared the antitrust aspects, but I suppose that even with that, the deal is worthless without the FCC’s approval.

I’ve also been easing into emerging market sovereign bond ETFs. I think their risk is overstated in the context of the current credit crisis, but it will be a while before the market realizes that, so I’m going slowly.

I’m still bullish on the Euro. Forbes is calling the end of the Euro, and I think they make great arguments. It seems not unlikely that Spain and Italy and maybe Ireland will just unilaterally withdraw from the European monetary union within the next few years in order to cut their interest rates. If they do, Germany and the eastern European countries will surely stay, and Germany will finally have the freedom to hike rates and crush its internal inflation, with obvious effects on the Euro. I’m in Deutschmarks if it does collapse.

Update, April 15th: I sit down today and see “Stocks in U.S. Advance, Led by Financials on Earnings; Tech Shares Retreat” on Bloomberg. Fortunately, I didn’t scale completely out of financials I am beginning to see why Livermore said he made the most money by doing nothing.