Thursday, August 02, 2007

Buckle Up

One final post this week and a quick comment. First the comment. As the market yo-yo's back and forth, one needs to remember to respect risk. That is something the current crop of financial professionals truly does not understand. Nor do most global investors. Old sages aren't typically found jumping for joy in this market. They've seen this act before. Now there are substantial messes across a wide variety of global markets. I can assure you that those who created the messes have little or no clue how to clean it up. More likely is that most will get eaten alive at some point. In other words markets love to punish stupidity. We've got that in spades.

Many traders and black box or mechanical trading methods so common in hedge funds use oscillators and short term conditions to determine trading points in the markets. The U.S. equities markets are about as oversold as they can get on a short term basis with ten day and McClellan oscillators falling off of a cliff. Rewards have been given by taking positions when we've historically hit these types of levels. But, I can assure you that those who believe the market is due a rally have no idea what they are talking about. The market it not due anything. Nor does the market owe idiots anything. A large number of hedge funds today are run by, well quite frankly, idiots as we are finding out. Now, I preface that by saying there are many brilliant people on Wall Street as there are in any profession or industry.

A rally may come or it may not. While circumstances haven't unfolded yet to support such a position of such, there are many data points which offer the potential hard and very fast blow lower. Here's a dirty little secret: bull markets with the characteristics of this cycle usually end quite violently and rapidly. Oh, and that doesn't mean we start another bull market in three months either.

Think this particular storm has passed and ready to dip your toe in the water as encouraged by some goofs on TV? (By the way, expect more storms.) Frankly, it hasn't even begun. Here's a comment made today by the CEO of IndyMac:

…our industry and Indymac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself. As a result, we have seen just since yesterday, many major mortgage lenders announce additional product cutbacks…some leaving subprime, Alt-a, and other products altogether or restricting some products to only their own retail channel (and possibly wholesale) and significant, additional price widening.

While we have very strong liquidity, a good amount of excess capital and there are no realistic scenarios that I can foresee that would impair Indymac’s viability, as I said on the earnings conference call yesterday…we cannot continue to fund $80 to $100 billion of loans through a $33 billion balance sheet….unless we know we can sell a significant portion of these loans into the secondary market…and right now, other than the GSEs and Ginnie Mae….the private secondary market is not functioning.

My interpretation? If you can, get the hell out of Dodge!

posted by TimingLogic at 8:06 PM

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