Monday, March 23, 2009

Financial Panic - On the Upside

We broke 800, faster than I thought we would. I figured there were a couple of days left of consolidation. Bulls and Bears hate days like this (at least both should). It is as much mindless panic on the upside as it is on the downside and impossible to really to be apart of (or at least I should say you should avoid being apart of it). If your rushing in orders today to initiate new positions, I think your doing exactly the wrong thing. I did not place a trade today, I barely even looked at the market (I worked out, read some, and caught up on some mail). Let the madness and instability settle. The spark for this rally was of course the revealing of the Geithner plan which should be a tell in itself that this rally is not based on fundamentals. Regardless of whether this plan will be successful, after all the other plans that were tried failed, will not be known for months or even over a year. It is inherently unknowable whether this plan will work. I have extreme doubts and place the probability pretty low but I disagree with Nobel winner Krugman that it has zero chance of succeeding (there are other Nobel winners who think there is high probability of success). The key will be two fold. Private capital willing to come in and banks willing to sell at agreed upon prices. Of the two, I think the first actually is the least likely. I come up with little one liners when people ask my opinion that sort of give away what I really feel about the situation (close to a month ago it was S&P 900 before 600, though I was almost to early and thought we may hit 600 sooner than I thought) before qualifying it with other possibilities. Today the one liner was that at best the plan will fail and at worst it will be money laundering. It makes the AIG bonuses look like momma's apple pie if you start digging back the onion on what this could end up meaning and who will benefit. This post at naked capitalism is a must read. In actuality this could hypothetically work and the money the tax payers lose would be much smaller if it solved the problem in the entire world and we are back to positive economic growth and everything fixes itself and we grow out of our problem. I just put the probabilities of that to be very very low.

Even if you think we are about to enter the next era and are full of hope about the Geithner plan, I caution you to look at the debt markets. They moved up, a little, but comparatively the move was tepid and in some spaces almost non existent. Investment grade debt, junk debt, abx, cmbx, they all improved, but very little. I heard, have not been able to confirm, that the CDS on banks tightened only slightly despite financials equities moving up 16.5% (as defined by the XLF). So basically the debt markets yawned at Geithner's plan while the equity markets reacted in mass hysteria.

Finally, to wrap things up, there is an article in the Financial Times that mentions China is floating the idea of a potential new world reserve currency. This is only a shot across the bow of our ship but I think this will eventually happen in some form or fashion which is why I am very long gold. If this were to occur, you would see a quick deterioration of the dollar and gold climbing so fast it will make your head spin. Like I said, this is nothing yet (I think such a reality is probably years out), but at the same time it is everything.

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