Crack analyst Richard Bove claimed that the financial crisis was over and it was safe to buy financials. That is a mighty bold prediction. The good news is that he is just an analyst, so if he is wrong, it won't cost him a penny. Traders, those who actually have money riding on the solvency of the financials, may have a difference of opinion. Although today's rally appeared to be a big relief, following yesterday's plunge, following the day before's rally, it's hard to believe all the bad news is behind us, and the financials are a screaming buy. Once again, I must emphasize that several of the businesses that the banks used to be involved in (securitization of CDO's, CLO's, CMO's, huge PE deals, CMBC issuance etc.) just do not exist anymore in the same capacity that they used to exist, and will take years, if ever to return to the same levels as before. The Fed's actions are obviously very helpful, but will they be enough? Some of the sources that I speak to are still terrified of the next shoe to drop, specifically some horrible news to come out of Merrill. The following article discusses the lawsuit that Merrill has initiated against SCA attempting to force it to honor its insurance contract on a portfolio of CDO's that SCA terminated. How this is bullish news, I cannot fathom. Furthermore, if all the bad news is over, why is implied option volatility in the brokers still freakishly high? Something to ponder over the long weekend...
Merrill/SCA
Thursday, March 20, 2008
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3 comments:
The Merrill/SCA link doesn't work for me.
Warren
K10 and I am for the most part in total agreement on you about the fundamentals that are and will remain in the market for sometime I'm afraid. The problem with markets is that they are always forward looking and for that reason alone you will always run into the same problem that faces all markets. "IRRATIONAL PEOPLE" Most modern economic theory is based on the rational person making a rational decision. As you and I both know that is rarely the case. I mean the number one rule in trading is cut your losses short and let your profits run...Its amazing to me how many people do the exact opposite and can actually rationalize themselves into doing it. I think the Fed knows the problem is far from over and to me the only real tool they have is to try and bleed this "leverage" out as slowly as possible. You are 100% correct when you mention what made all the financials money over the past couple of years (CDO's, CLO's...blah, blah, blah) is not coming back anytime soon. The reason it all worked is because they got everyone around the globe who was long dollars (there seems to be a lot of those these days) to buy most of this paper or should I say "financial ingenuity." I have no idea if the Fed has enough bullets to keep this up for an extended period of time. All I know is that its about the cash. Always has...always will be. No sort of fancy accounting, going back on you word and not paying you the insurance you are rightly entitled to, or bitching at you because your changed my haircuts in midtrade are going to prevent the end result. Someone is going to have to pay for the fckup and the Fed is diligently trying to avoid having the U.S. taxpayer foot that bill. But as you said, I just don't know if its going to be enough.
I fixed the link. Sorry about that!
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