Wednesday, September 10, 2008

It's DeJa Vu all over again

Looking at the headline of yesterdays post I realized that the market is one way. The "bailout" of Freddie and Fannie are not being taken by the market very well and this is adding to the overall feeling of exiting carry trades while there is still time.

Lets look at the plan for a minute. The plan essentially wipes out existing common stockholders in both companies and further dilutes preferred shares in the government entities. Remember it is not only the like of you and me who own these financial but other financials and Hedge Funds. This should cause these financial institutions (JPMorgan, Lehman, Merrill) to have to write down even more and create a bigger liquidity situation. I think it is clear that Freddie and Fannie will not be allowed to fail. But at share prices at less then a dollar for share holders they all but have.

This market is a mess and time and only time is going to get us out of it. There are more layoffs to come, more write downs and more bank failures. I will give you a little story about me. In 1991 I got married, bought a house in Westchester County New York. I paid 181,000 dollars for a split level house. Over the years I put very little work into the house, but kept it properly maintained. In 1998 I decided that the house was to far from work and I prepared to sell it to move closer to my job. During the seven years that I owned the house I never looked at what it was worth (Really!). When I went to sell it the Realtor told me to list it at 179,000 dollars. She showed me the competition and it seemed like the proper value. So if you take my situation as a sample for the real estate market as a whole then housing prices didn't move for seven years. Now that is really simplifying the market during that time period. I am sure many market went up, some down and there was a few hills and valleys in between, but essentially the market was unchanged for 7 years. From 1998-2006 the market exploded and made many people rich. Could we be in for a 7 year flat cycle ? Could there be a few hills and valleys over the next 7 years but essentially be back to 2006 levels by 2013 ? Well I don't know. We could replicate what has happened in the NASDAQ.The market was in excess of 5000 in 1999-2000 and then collapsing never to see, even close to those levels again (at least so far).

When you see Bill Gross (Pimco) telling you to put your money in cash that's one thing but turn on FAST MONEY on CNBC and they are suggesting that themselves, then you know this make take a little longer then previously thought.

As for the markets, being long dollars is the only way to be right now. The dollar is CRAZY BID against emerging markets as risk aversion is the name of the game. Looking for a widening interest rate differential is also the trade in play.

It hasn't been easy !!

Good Luck and Good Currency Trading....



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