Friday, August 10, 2007

Capital One

I want you to take a good long look at the above chart. It a 12 year picture, which is not a insignificant time frame of a significant diversified financial player, Capital One. This chart is directed at those who think the sub prime, credit fiasco is coming to an end. I wish I could agree but rather the evidence argues that it is still early in the game with much to come. This rounding top is textbook and is evidence of a market in general rolling from bull to bear ! I do not say this lightly or with any vindictiveness but rather as a statement of fact. The financials must lead, there is no other way. I read once somewhere, and I stand to be corrected if I am wrong, that the entire middle east economies a few years back were smaller than the economy of Spain.

I would attribute this to their lack of a fractional reserve banking system and its multiplier effect in permitting the economy to grow. I don't want to debate economics as I am a neophyte but the expansionary phase we have experienced uninterrupted for the better part of 25 years is reversing. The evidence is weighted via the dollar and more importantly the bond market which I have gone on at length about. Remember 5 downward trend lines have been busted. For those who would still question this I would then question their objectivity. This can get lost when the facts don't conform to your view and we can all be guilty of it.

The Fed lowering rates is expected to be a panacea to the market, again I say look to Japan, look to Wells Fargo who raised jumbo 30yr rates from 6 7/8% to 8% overnight. Sometimes risk and default (2 words that many thought didn't exist until recently) mandates higher rates and this is a novel concept to the financial engineers out there in hedgistan who follow models and formulas and are disconnected from the real world. Kinda like their mark to model CDO portfolios were disconnected but I digress.

One last point regarding the Fed lowering interest rates. I would suggest you start to think about the implications to the U.S. dollar. All I can say to these rate cut proponents is BE VERY CAREFUL WHAT YOU WISH FOR ! Good trading to you all.

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