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Stock Traders Profiting from QE2 ...3, 4

Stock-Markets / Stock Markets 2010 Dec 15, 2010 - 04:40 AM GMT

By: Bob_Clark

Stock-Markets Best Financial Markets Analysis ArticleWhat about Ben? Two stories.
There has been a lot of chatter about the Fed and how their QE2 strategy is failing, but is it?
The government has just agreed to borrow $600 billion dollars from them. That is just a down payment. The government has to refinance 30 % of it's debt this year and 50 % of it's debt over the next 3 years. At present, the government pays approximately 1 1/4 % on the exiting debt.  I haven't heard the Fed guarantee the Government a low rate on the new refi loans, just market rates.  The higher rates go, the more money the federal reserve banks make. 

The Government is the perfect victim, they will always make the payment on time and in full.  
Think about it, after an orgy of greed and gluttony at the home mortgage trough. When all those bubbles gave them indigestion, the Fed printed money to bail out it's own banks. At the same time they turned predatory, forcing competing smaller banks to close or be absorbed.
They said it was to make the banks whole again, so they could start lending to mainstreet and get the economy back on track.  That was a flat out lie and never the intention at all. The money was to be used to jack up the price of assets backing the existing loans that nobody could repay. Do not forget that when a debt goes bad, the bank grabs the underlying asset that secures the loan. The last thing they want to see are deflating asset prices on underlying collateral. 
They did such a good job of ramping up the price of assets, that JP Morgan has gone from insolvent, to cornering the copper market.
In this latest scam, they can lend trillions of dollars to the one entity that will be sure to service the debt and they can jack rates higher at will.  It is now up to the government to get the economy going via fiscal policy. They will be squandering money hand over fist and there is no way they will ever pay it back. The banks will get their cut and they have no skin in the game. This is going to make the housing bubble con look like small potatoes. So far, the Fat Boys are way ahead of the curve. Trade on what they do, not what they say.
I am writing this article because the situation we are in, will change peoples lives forever. You are either on the up escalator or the down.  The wealthy and the well connected are on their way higher. The rest are on their way down.  That is well documented.  What isn't documented, is that god hates a coward.  If you sit paralyzed with fear, you are going down. 

I teach people to trade and invest.  I work with people in many different circumstances.  They all have varied emotional strengths and weaknesses.  I want to tell you the story of one of my students.
Ben's story 
Back in August I received an Email from a young man named Ben.  He said he had been reading my articles online and was hoping that I could help him.  He was smart and believed in the hyperinflation story. He thought that investing in "things" that would benefit from what the banks were doing, was a good way to improve his future.  He had borrowed money from a family friend and was heavily invested in various inflation hedges. When I say heavily, I mean when he told me his position sizes, my jaw dropped. 

At the time, the guru chatter on the web, was that the stock market was about to crash.  He was positioned to take advantage of the coming collapse. He was leveraged double short the S&P, using the Ultra bear fund.  He was also long the vix because he was expecting a big ramp up in the fear premium as stock priced collapsed.  He had already made money on both positions because the market had taken a hit and was lower than where he had sold.
The reason he came to me was that he had recently seen a large draw down in his account. I believe it was 30- 40 %.  Don't forget, it was borrowed money and quite a large sum. He was happy that he had nailed the stock market short, thereby regaining some of the lost ground in his account. Yet he knew that he needed a way to better manage those times when he got things wrong.
I had just written an article for Market Oracle at that time, suggesting there would be a nasty short squeeze in the stock market. I think that scared him. He told me he was a big picture guy.  He wanted to know if I could help him with trading technique and risk management. 
There was something that impressed me about him from the start.  The size and leverage of his positions told me he was serious.  He was confident and he had guts.  Even with the large draw down, he still believed in himself. 
The problem was he was getting pull into the internet market chatter and not following the Fat Boys.
The first question I asked him was. Did he have any kind of stop loss on his short positions?
He said, he did not, but he was sure that prices were going lower. I said "What if you are wrong? What if they go up? What will you do?"  He didn't have an answer.  I think I said something like, "That is the reason your account has seen the draw downs."
I went on to give my usual lecture. Saying that looking at the big picture fundamentals was ok, but when you use leverage like he was doing, it only takes one mistake to kill your account and gut your confidence so badly, it never comes back. You must have a plan before you make any trade.  Take care of the pennies and the dollars will take care of themselves.  In other words focus on the trigger points and the stop losses.  Plan to let your profits run when you are right.
I suggested he stay long his gold and silver, but cover his short position in the stock market and the long position in the vix.  I showed him why stocks were going to surge higher. At first he resisted the idea of covering his shorts. Then, after working together for a couple of days, he informed me that he had bought back his shorts. Right on the lows as it turned out. We continued to work together for several weeks. The market began a multi month run as you can see. With no stop loss and no plan, a move like that may have ended his career.
Ben is working on his own now, trading the futures markets.  He trades the 5000 oz silver contracts. They are volatile and dealing in them takes steely nerves. Each contract is worth nearly 150k. He has doubled his account in a couple of months and I think he is on his way to a great future.
I wrote about Ben to point out the attributes that allow ordinary people to seize the opportunities that the Fat Boys are giving us everyday. I am very fortunate. Part of my job lets me into people's lives. I see real people actually taking control of their circumstances and changing them.  
The key to making change is twofold.  First, get the skills and tools needed to control risk, they lead to a trading plan.  That plan gives you discipline and confidence.   Second, be bold.  Always be bold. 
Forget the "we are toast" articles you read every day.  There is a great divide building between the rich and the poor. The reason is the rich don't think we are done. The government is weak. The Fat Boy's power is growing.  The central bank's stranglehold tightens every day.  Nobody is going to change things back to the way they were.  Nobody is going to arrest Bernanke and charge him with racketeering.  It is every man for himself now. Money will flow to the rich, but it will also flow to the brave. That is a financial law of nature.
Stop deluding yourself. Look at the chart above. What you see there, are great trends and great markets. Those trends are producing real gains for those that are willing to take a position. The economy may be toast but the markets are not. Choose to sit and do nothing or trade and prosper. 
It is your call, but remember. God hates a coward. 
Learn to trade with the Fat Boys. You are either with them, or a victim. Go to my website for help.

Bob Clark is a professional trader with over twenty years experience, he also provides real time online trading instruction, publishes a daily email trading advisory and maintains a web blog at  his email is

© 2010 Copyright Bob Clark - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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