MORTGAGE MELTDOWN - 8/10/2007

The press is describing this week as the Mortgage Meltdown. This is the crash everyone knew would happen, but no one did anything about. Certainly, Bear Stearns did not prepare for it. Nor Goldman Sachs. Nor AQR or James Simon or Sowood Capital or any number of hedge fund masters of the universe.

Their excuse: THE MODELS STOPPED WORKING.

George Soros was right when he said that the social scientists have elevated themselves to the level of real scientists. And I might add that the real scientists have elevated themselves to the level of temple priests. Using all their statistical models, these people have the air of invincibility. Its like they are donning priestly ropes and entering into the Holy of Holies, something us mere mortals are not allowed to do.

OK, so how did I do. It was the best of times, and the worst of times.

The good news: I have hit a new high in my equity.

The bad news: I had to take some serious pain to do so.

Mark Cook says that the best advice that he had was from Linda Raschke who told him, "If you continually trade, you will make money." If you have an edge then keep trading. Keep trading till it hurts. Keep trading till your capital is gone.

What was stopping me was fear. Once you've resigned yourself to the idea that you could lose all your capital, then the fear is gone, and you just keep plowing ahead. After a while, if you've made every mistake there is to be made, and you still have money, then you're bound to MAKE money.

On Friday, 8/10, my signal was S2. Intensity was high. Instead of using the canonical rules of shorting (which would've worked also), I noticed that recently these have been excellent buy signals. Combine this with the rise in mentions of 1987 & 1998, this lead me not only to buy futures but to buy stocks.

I bought 1434, 1437, 1441, and I sold 1449,1450,1455. My target has gone up to 15 points during this high volatility period.

LESSONS:
1. Use TRAILING STOPS. This is an excellent way to automatic reduce your risk, and sometimes allow you to capture outsized moves.
2. When you have an edge, TRADE MORE.
3. Have CONTINGENCY PLANS worked out ahead of time.

Finally, YOU CANNOT OUTGIVE GOD. I have committed my profits to the Lord. I will be clearer about this accounting wise.