Sunday, November 11, 2007

Ultrashort Financials/Real Estate & The Yen along with some Thoughts




I was away from my post yesterday so lets start with Bernanke's testimony from Thursday. Ron Paul asked Dr. Ben some tough questions and the answers given were beyond stupefyingly unbelievable, they were outright ignorant. No effect on domestic prices ? Are you kidding me, I was born at night just not last night. This from the same man who told us everything sub prime was contained. Well, if things are so contained, the economy so strong, the dollar weak, crude strong, and gold strong why not rate hikes instead of cuts ??? Can you imagine the bullshit answer we would get for that one!
In his defense, Bernanke is expected to fix this mess(via Greenspan) which of course he cannot as it must run its natural course. Dr. Ben will take the blame which is in some ways unfortunate given Greenspan was responsible for bludgeoning the victim(U.S. economy) and Bernanke is the EMT trying to resuscitate it.
The Fed like multitudes of equity traders know only 1 gear. For the Fed it's cut rates, cut rates, and if that fails cut rates more. Likewise for equity traders its buy long, buy dips, and be bullish buy the dips, the market always goes up !
The housing bubble/ATM driven debt gorged consumption economy is in serious trouble. We are headed for a severe recession if not worse. The CDO/CLO/Sub prime/Alt-A/Derivative situation compounds this situation exponentially as leverage always does, magnifying the good AND the bad. Unfortunately, many in the markets have forgotten this simple lesson.
Ambac, MBIA, MGIC et al have all been put on review by Fitch ratings. For the laypeople a downgrade here means downgrades on all the bonds they guarantee which could create a very negative chain reaction.
The housing crisis is deepening not getting better. We are in the 3-4th inning here. You bottom fishers can keep fishing but until the banks and lenders start dropping like flies and by this I mean bankruptcy or the Feds stepping in steer clear! Rallies in the financials are to be sold !
Between level 3 assets(hmmm)of the big brokers and the possibility that Fannie & Freddie can put back any loan they bought that is found out to contain fraud you have a recipe for an unmitigated disaster. This box of horrors is just opening up. Please ignore the TV pundits and steer clear of the financials, the charts look just awful, not to mention the fundamentals which some say are worse.
I keep hearing CNBC say blood in the streets, time to buy financials. We haven't even begun to see blood, we need banks folding, major banks on the brink with the Feds stepping in, then we can talk blood. We need to see interest rates punitively high. Real bankers not lawyers running banks, the way they were meant to be run(4 C's of credit) then we can talk. Until then no, but my guess is when this unfolds most will be petrified to touch the financials while at the same time loading up on gold at $2500/oz, silver at $75/oz and oil at $225/bbl. Ask yourself the question....would I have bought the banks/financials in 1990 or worse how about 1980? Be honest and to help you, get out a good mirror !
Share buybacks you say. Share buybacks based on debt was and always will be a fraud on the shareholders. Like getting a home equity line to buy more homes. (aaaaaah leverage). I have said this before and will say it again, we are headed down the same road as Japan circa 1990. The only difference being this will be worse due to the amount of leverage and the pervasiveness of derivatives throughout the system.
This is not the end of days by any means just an extremely painful cleansing and for those of you looking for a safe harbor in emerging markets might I suggest you read up on the phrase liquidity as it could go MIA just as you need it most. It tends to happen at the most in-opportune times especially when leveraged money all wants out at the same time. Not because they want to but because they have to. That nasty little fellow called the margin clerk has not been laid off by your brokerage firm and he will not be ignored.
Now I haven't even touched on the world political situation of Turkey, Syria, Iraq, Kurds, Pakistan, etc. You think caution might be in order? Yet all this is occurring and we are barely 5-10% off the all time highs on some indices. So who has it wrong then?
The credit markets?
The currency markets?
The commodity markets?
The equity markets?
It's up to you to decide but I suggest you include some independent, off the beaten path, non-conventional thinking in your analysis. Good trading to you all.



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