We've been hearing a lot about the RTC2. I still haven't made up my mind of how this fund will work. My suspicion is that it will be a bankruptcy avoidance fund, if they had it last week lehman could have survived by dumping the assets to the RTC What we will not see is they going out in the open market and buying Wachovia option arms for no apparent reason. when paulson says they will buy assets from solvent instutions it reminds me of 'we will not use the bazooka, oops bazooka will cost $200b', once that authority is there the temptation to avoid a large bankruptcy will be irresistible Lots of analysts are trying to make sense of this fund based on what the policians tell them. They forget an important probability fact The fact the largest bankruptcy in US history happened after the fed said no to bad assets(with reasons beyond just moral hazzard) and a treasury fund was created to buy bad assets happened in the same week is not likely to be uncorrelated If this is the case this will reduce the total losses of the financial system so roubini might be too pessimistic with $2T but the shorting financials enviroment still good because the stock price is likely to nosive when a bank says their assets are turning sour and RTC rumors start. This is all highly speculative, we will need more information
Daal, Thanks for your comments about RTC version 2. Another ugly financial company to watch is AIB. While the US real estate market is front and centre, property bubbles are also deflating in other countries such as Spain and Ireland. While most financials had double digit percentage gains on Friday, AIB didn't rise by as watch, even though the Irish Stock Exchange (and the NYSE) banned shorting on AIB. One to watch in future days and weeks. Also on my watchlist today are WM (article in WSJ) and ABK (having a tantrum about a possible downgrade).
As far as non-US shorts go. I'm looking at Swedbank(STOCKHOLM: Sweda) http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=SE:SWEDA&sid=132075&time= They are financing latvia gigantic current account deficit(reached as high as 22%). when the latvian currency collapses they wont be able to get their loands back because the latvians borrowed in foreign currency beliving that the latvian peg would hold. as a long as they keep the game going swedbank can keep the lavtian currency alive but the day of the reckoning will come when they realize they are toast and the Lats is massively overvalued Imagine that the bank of england was able to defend the pound against soros and others by getting a huge supply of dollars from a naive US bank that keep lending them, well that bank is the Swedbank. One day that bank will realize they are toast because the currency will collapse and they are getting a huge default. But that could take time
My new fed funds future position is showing a loss. I coumponded the mistake by averaging down too soon. I do however remain highly confident the fed will not raise rates in the next 9 months so I will just have to ride this one out if you look at the employment situation and jobless claims it bad and getting worse http://premium.econoday.com/reports...yment_situation/year/2008/yearly/09/chart.gif http://premium.econoday.com/reports/US/EN/New_York/jobless_claims/year/2008/weekly/38/chart.gif Only the volcker fed has ever raised rates in declining employment to I'm basially jumping on the trend here my risk is a turn around of this and perhaps a new oil crisis. I might be able to hedge the oil risk by buying calls on USO, that should protect me against a disaster in the middle east doubling oil in days On the treasury fund, the democrats are pushing for warrants and equity stakes on the banks helped. The RTC death machine is being built. Predicting the likely candidates to be using the RTC should lead to some serious profits. One candidate on the top of my list is WB
The credit crisis is running at full speed with WM going bust and yet the SEC has shutdown the hottest game in town. I would like to ask how are you all playing this, SSFs, options seems are all being affected on their pricing and I think its pretty darn likely the SEC extends the ban for 20 more days
Long puts (sometimes also selling a lower strike put to reduce the overall premium paid). Selling call spreads where I am not as interested in participation on the downside.
An update on financials I'm looking to short (or add to existing positions): Stocks of companies that have been bailed out, yet still look expensive: FRE, FNM, AIG (and maybe WM, depending on how it trades in coming days) Boo hoo I don't want to be downgraded or else I'll have to raise a huge amount of capital: ABK Poor quality banks: WB, NCC, AIB, IRE Poor quality companies that need access to wholesale funding: MS, UBS, CIT, SFI, GM, F, SIRI Some afterthoughts: RBS, KEY, ETFC Some 'trust banks' that need people to trust money market funds after the Reserve Fund debacle: STT, BK, LM, NTRS Some smaller stuff: CORS, DSL, BKUNA, VNBC and maybe FED Too big to fail, and/or too connected to fail. so although they won't go to zero, they might still decline by a bit: C, GS I am watching but not confident about: RF, ZION, FITB, MBI
The following "wow" list is of well-known companies to fail (or almost fail) since the start of the year: CFC kind of (why did BAC pay so much?) BSC TMA IMB / IDMC September specials: FRE and FNM LEH MER kind of (why did BAC pay so much?) AIG WM
An update on how some of these crappy financial stocks are trading premarket: WB -20% MS -13% NCC -13% SIRI -8% DSL -18%
The main points of the RTC2 seem to be Liquidity providing Partial Recapitalization of banks Oversight Tax payer protection Participating on upside Executive compensation reform Only two are likely to help the market at all and even then that is likely to be hindered by the fact that not a lot of banks will participate given the quasi nationalization that will have to go through, everything else was created not with the economy or financial system in mind but just to please the electorate This shows that my initial suspicion could turn out to be the case, the fund will be used to help mergers and avoid bankruptcies Bernanke was trying to make the point that if the terms are too severe then banks will only come forward when they are in big trouble, well the terms seem serve, this might mean the credit crunch is not likely to improve given that banks will keep their lending down till they HAVE to go through TARP Having a crucial but unpopular legislation to pass right before an election could mean that US economy and financial system will pay the bill for the bias of policians of pleasing their base. This could also mean lower fed funds in the future. I'm not sure how the suspension of mark to market will affect all of this however, I would like to hear meredith whitney on this one