Where Do Investors Go from Here?

It is very simple to see where opinions of the current market have their origins: do you have a vested interest in promoting it? Do you have a large equity portfolio, a large share of Goldman Sachs (GS), or other financials, making you a big promoter of the bailout? In other words, those for the bailout have long equity positions they can't sell, and those against are not in the market.

Elite E Services' primary agenda is the development of automated systems, so the regulatory structure of capital markets is really none of our concern, assuming they are functioning. We see however liquidity problems even in the FX markets, the most liquid market in the world.

Last Sunday, before this bailout was announced, we saw 100 pip wide spreads in multiple bank feeds (not retail brokers) which were, according to our sources, REAL market spreads. This is very concerning and has no valid explanation. Since then, other retail brokers have been plagued with liquidity issues that have been explained by liquidity providers dropping out of the pool.

EES has a theory about this, starting with Lehman. Lehman was one of the top 10 FX liquidity providers, and while not as big as Deutsche Bank (DB) or UBS (UBS), it was the Prime Broker of many smaller retail FX brokers and other relatively small CTAs and Hedge Funds. Therefore, just the removal of Lehman from the provider pool has created a void.

Secondly, the more obvious reason is that traders do not want to take fresh positions. In either case, EES's concern is that we are headed into a period of protracted liquidity, and can expect widened spreads and thinly traded markets, even in FX. FX is not a credit market directly but any financial transactions cross-border are supported by FX transactions, thus, any lack of liquidity in any market will also affect FX. Traders should focus on medium and long term positions, and scalpers can consider themselves out of a job for now.

There are also rumors the reason the USD is up is due to position closing and redemptions of funds into USD and USD cash. What does it all mean, and where to go from here?

What we can expect:

• Treasuries to be downgraded to junk status, due to the absorption of F&F debt and now the toxic debt included in the new package.
• A complete restructuring of regulation in US with the Fed and the remaining families at the helm (Goldman, ML, etc.).
• USD to get 'crushed' according to London based sources and other FX analysts.
• Massive, widespread regulation.
• Foreign Exchange controls, particularly those involving USD-short positions.

Many manual traders are having a hard time in these markets. EES's automated systems are doing fine, if not better than normal in these market conditions. From a fundamental and technical sense, the markets don't make any sense. For example why is the USD up considering the calamity unfolding on Wall St. A bailout would print 700 Billion in fresh USD, making the dollar lower (in theory). Any action by the Fed would be to lower rates, once again, indicating a lower dollar. Yet the USD rises.

Until things settle down, EES recommends being long Swiss Francs and finding good performing CTAs and staying in cash and cash equivalents (not T-bills). Stay away from Hedge Funds trading in complex financials. Find banks with high credit ratings and low leverage ratios. In other words, use the common sense you should have been using had Wall St. not tricked you into investing in high grade junk and housing.

At the United Nations, an Australian reporter accosted the actor Michael Douglas during a press conference and demanded to know - with a straight face, mind you - whether he felt any responsibility for the crisis because he delivered the line 'greed is good' as the character Gordon Gekko in the film Wall Street. 'Are you now saying, Gordon, that greed is not good?' the reporter asked. 'I'm not saying that,' a bemused Douglas replied. 'And my name is not Gordon. He's a character I played 20 years ago.'

Stock position: None.

Comments

[Think-About-It]

Joe, how long can the dollar hold up?

2008 Oct 02 12:36 PM

[bigmoney]

FXF (swiss francs) has been sagging relative to SHY (1-3yr treasuries) over the last 3 months.

2008 Oct 03 07:09 PM