Gold Digger's  Instablog

Financial markets are purely dominated by speculators these days with most traders slush with free or almost free money. What can be better than an opportunity to borrow dollars at 0.5% and make at least 4-5% every day from those borrowed dollars. That's why we see up or down spikes of 1-2% in equities markets every day. Now combine that with 2x and 3x ETFs (DDM and DXD) and market traders can make a bunch. Though I don't see it helping individual investors in any way because unfortunately they don't have direct access to these low teaser rates set by central banks around the world. But then who cares about them. They don't contribute millions of dollars towards political campaigns and lobbying. So real mandate of central banks is to help just market makers make a lot of money. Rest all is swept under the carpet. For example, there was some noise about Goldman Sachs (GS) benefiting from huge treasury bailout of AIG. But nobody remembers that anymore. I remember Bloomberg asking Federal Reserve to provide names of beneficiaries of emergency lending facilities and amount of such lending to each financial institution. Federal Reserve Bank's response in the court was that it will jeopardize nascent recovery in financial markets and that "some financial institutions will be hurt irreversibly". So lets not talk about that either. Similarly nobody wants to look at the balance sheets of those banks anymore as long as they have access to unlimited funding provided by Federal Reserve. All this is in the hope that if you keep sweeping everything under the carpet then eventually it will disappear. However, I believe that just by closing the eyes balance sheets don't improve and a savvy investors should always look for such opportunities where other are falling for the trap. So no matter what Fed says, I don't think Citi (C) and Bank of America (BAC) have any intrinsic value remaining for equity holders to warrant a $4 and $17 price tag. Problem is that Fed thinks it can assume all the massive credit risk on the balance sheet of these banks without the world noticing it. I don't buy that theory from Ben Bernanke anyday. Either he will create a long term fundamental rout of US Dollar or he will have to choose the right path and acknowledge the fact that credit for masses within the US has to be brought down significantly. Today job loss figure was 216,000 instead of market's expectation of 230,000 and market seems to be celebrating it while turning the blind eye to other alarming number of unemployment rate reaching 9.7%. In my opinion later figure is far more important than the first figure for two reasons. First, 216000 is still a job 'loss' and not job 'additions'. So the fact that it was 14000 less than expected seems utterly insignificant to me. Second, unemployment rate is a more sticky figure because most of the jobs that were lost in this cycle will be very hard to replace in the near future. Due to the boom in stock markets and credit euphoria until 2007, most of the companies were overstaffed and over producing. That scenario may never comeback or is at least years away. But stock tradrers slush with cash at 0.5% would not like to wait that long when money can be made in both up and down stock moves. So I think markets are getting primed for a significant pullback. Now stocks may not fall to March 2009 lows but around 20% pullback in US stocks from here seems highly likely. And world markets will follow the pullback for sometime until they can prove that their economies are now significantly decoupled from US consumers.

Disclosure: No position is GS, AIG, DDM or DXD at the time of writing. I might open a position in DDM or DXD.