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Diary of a Hedgehog: Biggs' Final Words on the Markets by Barton Biggs

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Be Long Term but Watch the Ticks

As the year began, little did I know the horrors that awaited me in 2011. But first there was some good money to be made.

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January 3, 2011

This time of year there is always the ridiculous obsession over forecasts of where markets will be a year from now. Mr. Market is smart and sadistic, and he couldn’t care less about our calendar. In other words, I have no idea. My sense is, however, that equities are going to work higher in the next couple of months.

As I go into 2011, I’m suffering from a mild case of acrophobia. I’ve been riding this rally since last summer with a very high net long, and markets have had a pleasant, gradual melt-up that has surprised a lot of people. In the U.S., big caps have risen 20% and the smalls are up 30%. Europe and the emerging markets have had roughly similar moves. The question now is whether I should reduce my net long substantially, say to 50 or 60%, and lie in the reeds for a while. As I circulate around, I find that the so-called “smart money” is uneasy and is currently taking off or has already taken off a substantial amount of risk. The prime broker summaries show that, particularly in the last two or three weeks, there has been substantial hedge fund selling of longs and shorts.

A Volatile First Half

Data source: Bloomberg

“Stocks are clearly overbought,” my co-conspirators say. “Bulls make money. Bears make ...

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