The Fed Decision and Moral Hazard
So I've been busy planning a little party so I haven't had much time to post but rest assured, I keep a very close eye on the markets. In particular, on a down day, LLL closed up $3.90 at $47.85, for a gain of 33%. That's what I call diversification! :) It could be the momentum traders or fund managers adding it for "window dressing" but I'm keeping a close eye on it for any weak signals.
Today's sell off, I think, represents one of the safest buying opportunities I've seen in a while. The speculators were hoping for a 50bp cut in the *discount* rate and got burned when they got a 25bp cut. The talking heads on the business news channels (aka economists, strategists, etc.) were saying the liquidity crunch in the financial sector will translate into a consumer recession. Unfortunately, this is not being supported by the numbers: GDP, CPI, retail sales, and long bond yields. They were praying for the 50bp cut to save their cushy xmas bonuses.
Frankly, I'm encouraged that the Fed has made a stand finally!! If banks repeatedly made bad risky decisions (CIBC?), they deserve to go down and the Fed should not save them. Unless there are some consequences, there is a problem of moral hazard at the banks. They will quickly forget the CDOs troubles and create new structured products with their new found liquidity to create another bubble.
This is the first time Bernake has made a courageous move and I think it sets the stage for a true recovery. The economic data is showing the Wall St. crisis is NOT spreading to Main St (sub-prime loans were made to lowest credit profiles). There's been a recession in US housing for almost a year, but the GDP is still growing due strong consumer spending, and strong exports (weak US$).
I think today was an over-reaction by Wall St "pros" hoping for an easy xmas rally. Some companies in certain sectors will continue to post profit growth over the next few quarters, and the markets should be heading up from here. I think these Wall st cry-babies will sell off some more for a few days, but this should give us some good entry points.
Again, I am recommending EEM as a high beta/alpha play with some good fundamentals backed by China, and Latin America. Are we all into buy that this week?
Misc links:
http://www.scotiamanagedcompanies.com/mcapp/home.do
http://www.claymoreinvestments.ca/ETFs/Public/etf/ETFHome.aspx
http://www.ishares.ca/index.do
I rediscovered the appeal of those split shares which eliminate the dividend (tax) drag of some of our favourite indicies. Compare SXT to the S&P/TSX 60 Total Return and you'll see what I mean.
posted by Junk Bonds @ 12/11/2007 10:39:00 PM
2 Comments:
Forget about the Feb being courageous. I take that back :)
The sell off wasn't much of a selloff. In fact both the Dow and S&P are only 5% off their all time highs and this 'correction' if you can even call it that has been mild, but perceptions of market gyrations and volatility have been high. The Fed is in emergency mode even if they only cut the rate by .25%. They have been loosening collateral standards and are even accepting MBS as collateral when previously only gov't issued debt was accepted. The Fed., BOE, ECB, Swiss central bank, and our Bank of Can. are coordinating efforts to add liquidity into the markets. Something is amiss I think in the credit markets that many stock market participants aren't seeing. The global bond markets dwarf stock markets by a wide margin, and because most people don't trade bonds directly, we are removed from some of the gyrations. Credit has been contracting in bank lending that has nothing to do with subprime mortgages. It may have started with subprime but the LIBOR rates are historically very high indicating fear and an unwillingness to lend. One of the downsides of securitizing mortgages or ABCP is that we don't know who's on the other end holding this risk; this has led to banks being fearful of lending for fear of counterparty default and it also makes bailouts more difficult when one doesn't know who to extend liquidity to.
This deflationary psyche/cycle can be self-perpetuating and I think that's why Bernanke is acting. Don't get me wrong, I think that the banks that had poor lending practices should get burned but unfortunately that's not going to happen.
My reading of the news suggests that Main St. is starting to cut back. Unfortunately GDP, CPI are lagging indicators. We can debate the macro until we're blue in the face but how can we invest into this? I still feel the financial sector is too early at this stage to be a safe bet. Here's an article about the CEO of Freddie Mac about the worsening outlook:
http://www.reuters.com/article/businessNews/idUSN1148707520071211
I've made my push for energy related stocks as I see this as a safe bet. This relates to your enthusiasm for the emerging markets as their growth will fuel the commodity bull market. Are there any emerging market funds that invest in the middle east like Dubai for instance. Their growth and reinvestment of petrodollars has been huge as well.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home