Today's Ideas:

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    Monday, September 8, 2008

    3 considerations

    After being one of the first websites/blogs to spot the FNM/FRE takeover by Uncle Sam here, I've decided to let others write about the bailout specifics. Suffice it to say, this is nothing more than an attempt to get investors (including Sovereign Wealth funds) to take their eye off the ball. No doubt there will be a deluge of opinions, so instead, let's discuss our next move.

    First, even at the levels stocks are going to open this morning, the current wide trading range remains intact. Long time readers know I am no fan of trading financials from the long side, and this has served well. Many traders even bought FNM and FRE on the prospects of a bailout, but these stocks (common shares for sure) are set to open near worthless. This illustrates perfectly the reason I stay in the same direction as the long term trends. I don't care how much you make in previous trades, if you lose 90% of your capital on a the most recent venture. Ask Fannie and Freddie shareholders how the "bailout" is affecting them?

    A second consideration should be to ask what has really changed? As the losses are reassigned to taxpayers, we must acknowledge that they are still losses. The credit contraction is in full force, and housing is just one aspect, albeit a large one. It is my opinion that not only will housing barely be affected, if at all, but that the credit seizure will not abate for many years. Several weeks from now, the Treasury's action will prove no panacea. Make no mistake, this is a form of panic, regardless of how it's presented. With that in mind, we still must wait for the hype to dissipate, before hopping on the proven direction for another ride!

    Now that we have a sensible perspective, we need to consider how to deploy assets. I can say with confidence that I would not be a long term (1 year+) holder of equities, mutual funds, or bonds (almost anything paper), including retirement accounts like 401k's and IRA's. Instead, I will look to use this short term euphoria for spots to get short groups (in the next fews days and weeks) that I feel have the worst prospects, financials and real estate. The only question is when to enter, and I'm happy to share with readers exactly when I make my move, via the Twitter ticker.

    Keep an eye on the $USD. It's relentless run continues, and it holds the key to the next moves in most financial assets. It is surprising to see it stronger Monday morning, but it's irrelevant what I feel, and instead it must be respected. Recall that my current positions will now have reduced profit goals, if I'm not stopped out before. Trade the plan, not the news or your emotions. I expect to have more frequent posts now that we're back in the thick of September, so check back frequently, or subscribe to my feed here.


    Blogger The Lonely Trader said...

    For spotting the Fannie and Freddie fiasco, I think I have to tip my hat to Nouriel Roubini, who predicted this back in 2006 at an IMF conference. (I also have to tip my hat to the fund traders who shorted the housing market in late 2006/early 2007.) As the markets "unleverage" themselves out of the first wave of losses, I have to say I had the same thought you did about sovereign wealth funds -- but I ultimately think that after their own heavy losses (as much as 55% in one case where an Asian sovereign invested in a major bank) they won't easily be fooled again. Interesting also is the pressure that China and other Asian governments put on the US to act on the mortgage giants. China must know that Fannie and Freddie aren't investment grade, indeed, *weren't* investment grade for some time before, so what is there true motive for prodding the US to act?

    (I'm not saying the US is doing China's bidding here. Only that we should look behind the veil of China's contrived actions and apparent motives...and perhaps worry a little about long term national security implications -- or "sovereignty" implications, if you will.)

    And I agree that if the purpose of the intervention is to distract, then it will fail. I am sympathetic to the idea that it is panic -- cerebral, and carefully justfied in measured terms and technical vernacular -- but panic nonetheless. But I also think that it's a case of "something must be done" as a political and economic mollifier, if only to give the appearance that something is being done. Perhaps these guys know that ultimately the markets must work this out, with a bit of managerial damage control from monetary and fiscal policy. I'll be interested to see what kind of regulation comes out of this, and whether the cost to taxpayers will ultimately be worth this new legislation when our economy ticks back up to cruising speed several years from now.

    And I can't help but feel intrigued by all the new opportunites that will emerge from this expanding pile of wreckage -- from both a trading standpoint and a socio-economic standpoint. Meaning: Maybe I'll find some good opportunities to get in at value somewhere and maybe the American people will grow up a little bit.

    Looking forward to your next posts.

    September 9, 2008 12:41 AM  

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