A month ago we increased client short positions from a net 10% to a net 20% (includes the 2X leverage). It seems to have paid off well. During the multi-hundred point daily swings in the Dow Industrials over the past few weeks, client portfolios moved sideways, lost a little, and showed very little volatility.  Now that we know the fate of the remaining investment banks, we will be reducing the 20% short position to 10% in the coming 1-2 months. We are waiting for:

  • The removal of the ban on short sales
  • The passage of the US government banking systems bailout.
  • The 3Q results from the US finance industry and retail sales data.
  • Comments made by the companies that purchased Lehman & Merrill on the quality of those balance sheets – having had sufficient time to understand the real exposure.
  • Time for the other financial institutions to understand their exposure to Lehman’s collapse.

Since fair value of the S&P500 is probably somewhere around 950-1000, and it is currently trading at 1150, there seems to be no immediate rush in removal the short position (RSW).  Stay tuned.