Bond Insurers / Market Thoughts

http://www.reuters.com/article/marketsNews/idUSN2835032720080328

Standard & Poor's on Friday cut its ratings on FGIC Corp and its bond insurance arm to junk status, saying the insurer has failed to come up with a plan to remain viable and write new business.

This was really no surprise as Fitch did it on Wednesday but this brings back to light the ugly reality that these bond insurers issues are not resolved. There may be another shoe to drop somewhere between now and the end of April when they start reporting earnings but if there isn't I would argue very strongly that Ambac and MBIA will be dropping their other shoe. When everything was blowing up with these two firms a month ago a band aide was applied and it disappeared from investors minds. I believe these two companies are still the most toxic thing in the market out there. Filings with the SEC over the last few weeks indicate that massive losses are coming. MBIA's reinsurer rating has been cut substantially which will create large losses for MBIA. My understanding is neither is writing any new business. You have Wilbur Ross backing Assured and Warren Buffett with his own company. These two companies is still what keeps me up at night when it comes to major worrying about systematic risk.

Looking at the market this week, if your a bull, you had to be disappointed. I thought the rally would have more legs than it had. I trade around my short book and hedges around my longs and for the most part I sat on the sidelines seeing how things would unfold. After the large rebound from the lows of two weeks ago heading into the end of the quarter from a technical perspective I was expecting much more strength. We did not get it. You still have the bottom callers everywhere. You cannot turn on CNBC for 5 minutes without hearing somebody calling a bottom. My personal conviction is that we are nowhere near a bottom but was expecting a stronger rally than we got. That leaves you with what happens heading into April? The markets will most likely finish positive for the month of March. That is amazing if you consider we lost Bear Stearns. I have been saying since January though that we were due for a month higher. You just can't go down every month. In late December heading into January the market drifted south and once the quarter and year ended the market tanked at the beginning of January. Is that what is happening again? Once we roll over into a new quarter will portfolio managers dump? Maybe. If you are near a bottom the start of a quarter can also be the spark that starts the buying. Portfolio managers hold their winners into quarter end (called window dressing) and then sell them at the beginning of the quarter and start buying what they think is actually undervalued, the beat up groups. i.e. financials. I don't know. To difficult of a short term call for me so I will stick to the status quo. I will probably start looking to add S&P 500 puts 6 to 8 months out in the next week or two. I took them off the day after Bear Stearns hit. It has been a small bet. I would short individual names.