i see, drink up then.
in the mean time, a new chain of e-mails in my in-tray that you should consider being fortunate to be able to read ... illuminating the way to the Great But Different Depression
E-mail 1: Counterparty Risk
"Basis Yield Alpha Fund, a hedge fund specializing in corporate and structured credit, on Wednesday filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets, court papers show."
I'm guessing that these guys had done quite a number of derivatives transactions - i.e. swaps, etc. with many of the Investment Banks.. Now that they are in bankruptcy, what happens to the trades? While JP Morgan claims to be "hedged" by selling off the risk to someone else, they now are not hedged, and perhaps out a lot of money due to counterparty risk. If we see more funds blow up, will we start to see some strains on the derivatives desks, not due to mishedging, but due to counterparties failing?
E-mail 2: Re Counterparty Risk
From 5-star to BK, that was hell of a call by S&P.
bloomberg.com
The Basis Capital funds had the highest five-star ratings from credit-rating firm Standard & Poor's before the ranking was put ``on hold' July 17. That meant it was under review because of ``issues potentially affecting the management of the fund,' S&P said.
E-mail 3: Re Counterparty Risk
The ibanks learnt a great deal since 1998's ltcm and relative to hf exposure and potential losses; it's the large over collateralization and not hedging which protects them well before the stuff hits the fan.. risk officers are no longer part of the backoffice.. they are the prima donnas. Whatever they say is the first and final word for trading, etc.
I'm bearish on financial stocks not because of hf exposure but the whole capital raising boom times we've seen for lbo and high yld will significantly slow down. Mortgage business for most ibanks were a big 25% of the profits generated for fixed income desks (mbs is 3x larger than tsy mkt, fyi) and this will see large layoffs.
Hiding out in tech and china h shares are good bets. gold has gone nowhere in this volatility and I think its signalling that the world is not falling apart. Rotational shifts not global doomsday is what the mkts are signaling I think?
E-mail 4: Re Counterparty Risk
could be.... another jello market aka the bottom in 2k +2.
and once again w/o the long demanded purification.
give it a 35% with a strong 55% bias :0)
thanks.
E-mail 5: Re Counterparty Risk
Looking at the charts this morning actually reveals what should/would be expected.
That is, a massive battle going on between the bulls and the bears at very important support levels. To me, it is kinda like American football when the team marches down to the opponents’ 2 yard line. The crowd roars, every move is analyzed, both teams put the big uglies right up to the line of scrimmage, just waiting for the huge moment of contact. That's what we're seeing so far, and while the bears have the data on their side, the bulls are not giving up without a fight.
The close tomorrow (Friday) is important as it not only marks the end of the week, but also the end of the month. (closes are a big deal for candlestick followers).
As long as the transports stay above 4780 (1 year m.a.), they are signaling that it is still okay to be long. But 5,000 is now huge resistance, as that was the low for the index in both May and June.
The financials (XLF and IYF) are already in bear mode, and any move towards a 50% retracement of the down move should be heavily sold (if we get there). That 50% level is also the point where the former lows were made in March. The financials have no only writedowns blowing in their face, but as Wen noted, their revenue models are seriously impaired for the next 6 months at least. Earnings will be bad, period.
Gold continues to move into a narrow triangle, and as Bill has pointed out, will probably move higher, but later than most people think and with perhaps a move down in the short run to shake out stale bulls. Note that the HUI Index has gone nowhere (between 300 and 370) for nearly two years now. Bulls have to be frustrated.
From the lows set in 2003, the US 10 year Treasury has been making higher lows in yields since then We are sitting right on top of that trend line. Does a break through signal a recession? Does a move to higher rates signal the Fed will try and reflate and devalue the dollar? I for one don't know which way this one is going to move.
The Yen and the Nikkei have always trended and moved along an 18 month moving average. The yen has weakened and the Nikkei has rallied for years now. The Yen has broken through its 18 month moving average as has the Nikkei. If we remain at current levels on the close on Friday, I expect the trend has been set and that we'll see 105 (at least) on the Yen in the next 18 months. Obviously, the Nikkei will head downwards as a stronger yen impacts the earnings of the exporters, sending those stocks southward. Tomorrow's close is important for the Japanese markets.
Ah, the S&P 500. It has touched and bounced off the 78 week (1.5 year) moving average in 2004, twice in 2005, once in 2006, and again a couple of weeks ago. So the bulls are still in charge on a longer term perspective (so far). But note that from teh highs in July to the bottom in August, we have now retraced exactly 50% of the down move as of last night's close. To me, it appears that any upside is capped at approximately the 61.8% fibonnnaci number, which is quite close to the daily lows set in May and June (twice) around the 1485 number. Of course, last nights close was not only at the 50% retracement level, but also at the point where we made the February highs before we went south in March. Lots of key numbers and support here. I'm still convinced that you sell rallies here rather than buy dips, and that you add to shorts from 1460 to 1485 or so. The confirmation will come on a weekly close below the 78 week moving average, which is currently at 1383.
I'm still perplexed as to why the equity markets have done so well in spite of the carnage going on in the credit markets. In my lifetime, it has always seemed that the credit markets led the equity markets.
Perhaps the debt guys are smarter than the equity guys. I guess you could make a strong argument that there are more amateurs in the equity markets than in the debt markets, and that they are the ones left holding the bag when things turn.....
One other note. Checking this morning, the rating agencies in the past 2.5 weeks (since August 13th) have downgraded 205 issues to either "D" or "single C." They have also downgraded or put on watch to downgrade 267 "AAA" rated issues. Some AAA issues have already been downgraded to as low as BB in one ratings review. I suspect that this trend continues, and that forced deleveraging continues unabated. This is a market with not one or two big bombs, but about 3 million smaller individual bombs (my predicted number of national foreclosures) that explode over a 3-4 year period. Maybe that's why things are going in slow motion (or so it appears) at times.....
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