Market Pivot Point

by: Joe Rotger

I just finished reading The game is up from The Economist.

If these securities are now downgraded, banks could be forced to offload lots of illiquid instruments into a falling market—one of the fastest ways to lose money yet devised. But if there are no buyers, banks may have to sell something else to shore up their balance sheets.

Undoubtedly, it's a hell of a good description of the markets' situation, it tells us what's happened in the recent couple of weeks. In short, there are no buyers for some highly leveraged and sophisticated credit instruments: CDOs, credit swaps, and the like.

It's quite evident by now, that the subprime mortgage defaults carried their losses well into the portfolios of hedge funds, the worse tiers of the bunch unexpectedly hurt the performance of the companies included in the better rated trenches...

Notwithstanding the credit rating agencies conflicting interests... which is another saga in itself... hedge funds are bleeding... and the banks involved with their leveraged loans are either taking a loss with their clients or asking for some quick reassessment of collaterals... which, in turn, is pushing hedge funds further into trouble... they have to sell and there are are no buyers...

Fortunately, the cavalry is not far away, and with the best general one could find to lead the charge, under these circumstances, Ben Bernanke. The Fed chairman has a life dedicated to the study of the 30's depression. So far, he has coordinated with the European central banks, and injected gazillions in cash... As this didn't work, he reconvened an emergency meeting and the Fed committee lowered the discount rate 50 basis points.

Will this be enough?

I don't know, and I don' care... I shouldn't.

There is nothing certain in the outcome of these antagonizing forces... We should always be looking for tests --that's Jesse Livermore's greatest lesson.

First Interstate Bank Fire. May 4, 1988

I'm inclined to believe that Mr. Bernanke's efforts will not be enough... The fact that loans were insured against defaults, through credit risk instruments, allowed liquidity to grow at an alarming rate into unchartered territory...

I'm certain that CBs are no longer capable of arresting and controlling credit markets. No CB fireman knows the extent of the gasoline deposits housed inside this burning credit edifice, built on unending bank lending and hedge fund leveraging, and borne from unquestionable confidence in credit insurance.

We're in a pivot point... I suggest a little patience.. to follow our orders with the new course of the markets.

BTW, keep an eye on copper...