8 replies to this topic

[kaiser soze]

As I do my weekly round-up, I am struck by how bad everything looks-the financial sector fundamentals, the technicals and the sentiment. For fundamentals, read Doug Noland. Even though he is on the team of a short only fund, he is quite a sane voice and did not get overly bearish either in Summer '06 nor after Feb-Mar'07. And now he is indignantly bearish.

I think nobody on this board needs to be educated on the technicals. Over to sentiment. I was scouring the headlines of a dozen newspapers and the usual TV news channels and I realize they're still talking about the Minnesota bridge collapse, partisan tensions in Congress, presidentials primaries, the Iraq war, Ving Rhames dogs mauling somebody, A-Rod and lead in Chinese toys. All this while credit armageddon has come to pass ?

If things are as bearish as I think they are, the fed may have to act sooner rather than later. In fact, the worse the situation is, the earlier they have to cut. If they do cut next week, that'll be the surest sign that extreme bearishness (Over the I-T and L-T) is warranted. By the time the markets are down 20 %, more confidence would have evaporated. From this perspective, now is the time to act. Plus Bernanke is an expert on the great depression, etc.

The boyz are bleeding. I took a look at the market risk, credit risk and derivatives risk as stated by the boyz in their latest SEC filings from end of May 2007. Unless their market positions have changed drastically in the last two months, they've got to be bleeding. Their books must be contracting-they do not have the liquidity to prop up stock prices even in the face of mammoth put buying and obscene shorting. The boyz are financial representatives of the nation and to a certain extent the case can be made that preventing their failure is tantamount to securing the national interest.

Ok if the fed cuts and the short covering rally comes, the boyz will unload atleast their liquid assets and free up some cash so as to compete with the hedgies again on a more equal footing. However unlike previous fed cuts, the rally out of this one will be rather short-lived because the strong hands shorting the market are probably not going to be intimidated. I even doubt the market will make it to new highs.

As bearish as I am, I realize the damocles sword of fed cuts is now hanging over the shorts. I have been playing it only with short dated put options so that risk is defined.

And if they cut when the dollar is already weak, the Euro, Gold and Silver will pop. A few cheap OTM calls in these is a plan of action I am considering. Of course silver will have the greatest pop and has no options available on it, last time I checked. Bond yields ought to go down but I am not sure because Russia and China may well distribute into the rally. The fact that commercials are still super-long equity futures is a tell IMHO that a rate cut maybe on the way. After the rally that ensues, expect the commercials to have flipped negative.

[atlasshrugged]

As I do my weekly round-up, I am struck by how bad everything looks-the financial sector fundamentals, the technicals and the sentiment. For fundamentals, read Doug Noland. Even though he is on the team of a short only fund, he is quite a sane voice and did not get overly bearish either in Summer '06 nor after Feb-Mar'07. And now he is indignantly bearish.

I think nobody on this board needs to be educated on the technicals. Over to sentiment. I was scouring the headlines of a dozen newspapers and the usual TV news channels and I realize they're still talking about the Minnesota bridge collapse, partisan tensions in Congress, presidentials primaries, the Iraq war, Ving Rhames dogs mauling somebody, A-Rod and lead in Chinese toys. All this while credit armageddon has come to pass ?

If things are as bearish as I think they are, the fed may have to act sooner rather than later. In fact, the worse the situation is, the earlier they have to cut. If they do cut next week, that'll be the surest sign that extreme bearishness (Over the I-T and L-T) is warranted. By the time the markets are down 20 %, more confidence would have evaporated. From this perspective, now is the time to act. Plus Bernanke is an expert on the great depression, etc.

The boyz are bleeding. I took a look at the market risk, credit risk and derivatives risk as stated by the boyz in their latest SEC filings from end of May 2007. Unless their market positions have changed drastically in the last two months, they've got to be bleeding. Their books must be contracting-they do not have the liquidity to prop up stock prices even in the face of mammoth put buying and obscene shorting. The boyz are financial representatives of the nation and to a certain extent the case can be made that preventing their failure is tantamount to securing the national interest.

Ok if the fed cuts and the short covering rally comes, the boyz will unload atleast their liquid assets and free up some cash so as to compete with the hedgies again on a more equal footing. However unlike previous fed cuts, the rally out of this one will be rather short-lived because the strong hands shorting the market are probably not going to be intimidated. I even doubt the market will make it to new highs.

As bearish as I am, I realize the damocles sword of fed cuts is now hanging over the shorts. I have been playing it only with short dated put options so that risk is defined.

And if they cut when the dollar is already weak, the Euro, Gold and Silver will pop. A few cheap OTM calls in these is a plan of action I am considering. Of course silver will have the greatest pop and has no options available on it, last time I checked. Bond yields ought to go down but I am not sure because Russia and China may well distribute into the rally. The fact that commercials are still super-long equity futures is a tell IMHO that a rate cut maybe on the way. After the rally that ensues, expect the commercials to have flipped negative.

when we peaked in 2000 the fed cut rates for two years and we still went down....thats what keeps the bears on edge in bear mkts !

Edited by iron cross, 04 August 2007 - 06:59 PM.

[beta]

Good post. Jim Rogers is on record that at least 1-2 investment banks will fail before this is over. BSC is the weakest of the herd, and puts to zero may work --- just may take a sacrificial Bear to save the Bull. LOL BTW, flipped my GS 180 puts (thanks, Kaiser !) for LEH calls on Friday. Will reload GS 180's @ 200-205, for the next move down to 140-150.

Edited by beta, 04 August 2007 - 07:06 PM.

[kaiser soze]

[quote name='iron cross' date='Aug 4 2007, 07:58 PM' post='304768']
[/quote]

when we peaked in 2000 the fed cut rates for two years and we still went down....thats what keeps the bears on edge in bear mkts !
[/quote]

IC,

I agree but remember that we did pop everytime they cut.

[quote name='beta' date='Aug 4 2007, 08:01 PM' post='304769']
Good post. Jim Rogers is on record that at least 1-2 investment banks will fail before this is over.

BSC is the weakest of the herd, and puts to zero may work --- just may take a sacrificial Bear to save the Bull. LOL

BTW, flipped my GS 180 puts (thank you!) for LEH calls on Friday.

Ill be looking to reload the GS 180's @ 200-205, for the next move down to 140-150.
[/quote]

Beta,

Congrats on your GS puts. For all the negative attention that BSC is receiving, I am given to understand that they actually have rather tight risk management practices. The candour of their top management in the Friday conference call is a sign IMHO that they're confident they'll weather the storm.

I also want to be on record that I think Blackstone (BX) is going to pennystock heaven. But puts on BX are a little too expensive for my taste. A bounce in BX would be sweet.

[ogm]

Good post. Jim Rogers is on record that at least 1-2 investment banks will fail before this is over.

BSC is the weakest of the herd, and puts to zero may work --- just may take a sacrificial Bear to save the Bull. LOL

BTW, flipped my GS 180 puts (thanks, Kaiser !) for LEH calls on Friday.

Will reload GS 180's @ 200-205, for the next move down to 140-150.

As for Doug Noland.. I've been reading him for years... maybe he will be right one of these days, but he's been bearish forever. Nothing has changed. You'll get too beared up reading him. Sorry, I'd recommend you treat that stuff carefuly.

As for the brokers:

I think BSC will be bought out at some point. Probably either by a big bank or by a foreigner looking to get into the US market.
UBS, HSBC, BAC, WM.. or someone like that. I even read KKR as potential buyer.
BSC now has only 13 bil market cap, and a damaged brand name. But they do have plenty of expertise, and niche opportunities. Under a different name can be a good asset.
as for GS... I think its ultimately the strongest of the pack. they make a lot of money on equity/commodity trading, and with these volumes going they have plenty.
They are getting hurt on IPO's and advisory fees though. But theiur exposure to junk credit isn't as huge as trading activies.
Now LEH... thats all about credit markets... thats the guy who will get hurt a lot.

I do respect Jim Rogers a lot, though.. I think he may be right.

Edited by ogm, 04 August 2007 - 07:34 PM.

[pdx5]

There is zero chance of a fed rate cut atleast through 2007.
I have listed the reasons for no cut in my posts many times.

Besides, the corporations in SPX are on target for a 10% increase
in earnings for the 2nd quarter. So, economy in general is humming along
just fine. China and other nuveau industrialized countries are all humming
along great.

So why would the fed drop rates and massacre the US$? Even the stock market
has not had a 10% correction and is actually up YTD.

So the housing is contracting. Big deal! House prices are still double of what
they were just 8 years ago.

[kaiser soze]

Exactly !! Even at the top of my post, I said "financial sector fundamentals" are very bad, not the real economy's. And it is when everything in the real economy is humming along beautifully that its time to be bearish. There is huge excess manufacturing capacity in the world-China being the prime culprit. The average US consumer is still the biggest soaker-upper of that excess capacity. He is already trimming his spending habits and is ready for a vacation now. The upscale US consumer has been doing great thus far and spending too because Blackstone kept buying up companies and the financial sector grew increasingly clever at new credit creation. That cycle has ended. Upscale US consumer is going to cut back. Have you noticed the high correlation between XLY and XLF in the last couple of months ? I dont deny that the Fed is between a rock and a hard place.

[arbman]

The commercial banks and the Fed pulled the plug on the credit on purpose and I agree Fed will not cut the rates due to the USD right here, but they will clearly give a signal that they won't be raising anymore, this should cause a small rally at least. The Fed will eventually cut the rates after all these credit abuses are wiped off, and they pretty much did. There is no such loans called subprime anymore. Now, if there isn't anything like excess credit at the moment, why do you think the gold is moving up now? Because the gold is acting about 4-6 quarters ahead of time. The gold traders know that they will have to eventually choose to inflate out of these problems again... The rate at which the commercial credit is growing is going to cause problems down the road for the consumption. China and all other countries depend on the consumption here. If they do not act by the end of this year, I am pretty sure it will be impossible for them to stop a deflationary spiral for a while since the businesses will start to shut down parts of their pipelines and output, the production will start to slow down and they will not pick up long after the demand justifies again... I think it is not chicken or egg problem here, the businesses react to the credit and cash markets, not the other way around. There might be some economic momentum left over still keeping the demand up right now, but we already know that there are dark clouds forming several months ahead... - kisa

Edited by kisacik, 04 August 2007 - 08:43 PM.

[beta]

Good post. Jim Rogers is on record that at least 1-2 investment banks will fail before this is over.

BSC is the weakest of the herd, and puts to zero may work --- just may take a sacrificial Bear to save the Bull. LOL

BTW, flipped my GS 180 puts (thanks, Kaiser !) for LEH calls on Friday.

Will reload GS 180's @ 200-205, for the next move down to 140-150.

As for Doug Noland.. I've been reading him for years... maybe he will be right one of these days, but he's been bearish forever. Nothing has changed. You'll get too beared up reading him. Sorry, I'd recommend you treat that stuff carefuly.

As for the brokers:

I think BSC will be bought out at some point. Probably either by a big bank or by a foreigner looking to get into the US market.
UBS, HSBC, BAC, WM.. or someone like that. I even read KKR as potential buyer.
BSC now has only 13 bil market cap, and a damaged brand name. But they do have plenty of expertise, and niche opportunities. Under a different name can be a good asset.
as for GS... I think its ultimately the strongest of the pack. they make a lot of money on equity/commodity trading, and with these volumes going they have plenty.
They are getting hurt on IPO's and advisory fees though. But theiur exposure to junk credit isn't as huge as trading activies.
Now LEH... thats all about credit markets... thats the guy who will get hurt a lot.

I do respect Jim Rogers a lot, though.. I think he may be right.

No question on the fundamentals, I agree that GS is best of breed.

And you're right that LEH probably has the largest exposure to credit derivatives. Check out this site, the numbers are shocking -- $20T held by LEH alone !! (see link here: http://www.lehman.com/fi/sct/).

But, perversely, LEH's heavy exposure is precisely what makes them "too big to fail," IMO. LEH's unique capabilities and role in the credit markets make them a "strategic asset" of the U.S. financial system, and I have no doubt that if needed, the govt would step in and bail them out in lieu of watching the modern credit system implode. Just last week, USFE announced they would list futures on LEH's fixed-income products (which I think are the largest offerings in the US). See press release here:

http://www.reuters.c...245532020070802

BSC, on the other hand, is basically a wealth management firm with non-unique assets IMO. I think Bear derives about 10% of income from global clearing operations, but it's not clear to me that Bear could not be "replaced." I do agree that there's a strong likelihood they may be acquired by a Sumitomo or UBS, but it could be cents on the $ in a Chapt 7 type proceeding. Check out the 08-09 Leaps pricing -- discounting future value to sub-60$.

Anyways, Im just keying off the charts.

Totally agree on Jim Rogers. He is a visionary, and one of the smartest investors in the world IMO. Anyone who listened to his strategic call back in 2002 to "put all your $$ in BHP" is up 400% on their investment.

Edited by beta, 05 August 2007 - 12:07 AM.