Insurance

Ok, there are two types SIPC (protect brokerage accounts) and FDIC (deposit accounts)... SIPC up to 500k if the brokers goes bankrupt (100 of that amount covers cash as well). This is meant to protect segregated funds at a broker. The regulations mandate the equity in investments your own is yours and banks must not "commingle" thier own funds with customer funds for any reason. So if the bank is on the level you equity should always be readly available and never used to finance any of the banks activities. How commingling of funds is not unprecidented, Refco definitely did back 2 years ago. FDIC- Banking cover up into a 100k... If you have more the a 100k in cash in a deposit account open another account at another bank.

Mark to Market+Bi-polar

So to expand on my last post. What allowed lehman to get to a 30 to 1 leverage? Banks are using a mandated mark to market system, where daily market price determines the value of the bank assets. For these banks their assets are bond/equity/derivative portfolio's. At the end of every trading day the banks risk managers would determine the current market value of all thier assets (and thier creditors assets for that matter) and assess risk/leverage based on the asset values relative to liabilities. When the value of all there assets were inflated they were sitting back and say "we're plush, let's take on more risk." When times are good asset values increase (preceived risk decreases) allowing the bank to buy more assets, inflating asset prices more, allowing other banks to buy more assets, inflating asset prices, rinse wash repeat... It becomes a perpetual motion machine, allowing asset prices to expand expotentially... scary thing about this system is that it can cause just as much irrational selling. It enables the market to get to extremes of optimism and fear (bipolar) regardless of actual asset value.

So think of the fed as the markets head shrink. Dr FED is currently perscribing some anti-psychotics to the market via liquidity overnight and bailouts during the day (roughly 200 billion for Fannie and freddy, 80 for AIG, 28 at bear). And some bedrest via suspension of the short sale rule. The markets can longer sell short the financials (let's now blame the hedge funds)...

Aside: I feel for the hedge funds, their always cast as traitors to the hard working american's pension funds. But they have a vital purpose, they are wolves that sort out the weak prey from the strong (companies that are mismanaged or obsolete) allowing cash to flow more easily to more effective avenues of growth. People respond to what they see and hear- it's far to easy to blame a greedy hedge fund when you hear your stock price is slashed or see a FOX news showing former employees leaving the corporate headquaters carrying boxes. What is impossible to see (and I'll agree quantif) is the new jobs it creates and the positive impact it might have in all other stocks a year from now. However the wolve idea can only work in a truely free market system where the pairies have no fences. The current environment put the wolves in the pen with the financial sheep.... so the Govie had to put muzzles on the them asap (no short sales). Don't fault the hedge fund because Lehman and AIG (aka a Hedge fund posing as an insurance company) are fat overstuffed greedy turkeys. Maybe some blood on the wall would occasionally remind the governance and the investors that is not always about immediate returns. But's too late for that because if we let the wolve loose everyone might drowned in a pubble of blood.

How is the market reacting? - FEAR... The govie has taking the position that we have to get out ahead of the Markets. The Scariest point is when the 3 month treasury rates went negative (this means investors for a very short period of time were willing to pay the treasury to hold their money) and then some money market funds went negitive causing over 50% withdrawls. These are considered the safest form of investment around this could almost be looked at like a run on the bank...

The above indicates fear of deflation... There is simply not enough money to go around to pay off every ones debts. So whats the fed doing to combat deflation, inflation. Lets start the printing presses. Our goverment is transferring bad assets from corporations to government and paying for by debasing the dollar through printing barrells of dollars.

I got to be honest, this is about the point where I am still searching for answer to the next cause and effect. I'm am not sure if current environment leads to a inflationally recession, a defaultionary depression, any combination of the two, or just a sideways moving lacklustor economy. The only thing I'm sure of is it does not lead to a strong growth (that is not to say assets might be undervalued at some point.)

So Lets call it an inflationary recession caused by Government stimulation. Who pays?- every taxpayer. Every dollar you own will become less valuable. How to profit?- Hard tangible assets like gold, oil, and commodities, like wheat and grain, will do well.

This is scary its like a fireman fighting a house fire with flame thrower (say that three times fast). I believe it safe to say, It was inflationary practices (decreasing rates) meant to created growth which got us here. The FED after September 11th reduced rates to fund growth. The cheap money did not fund sustainible long term growth it supported subprime mortgages and peoples overall debt bingeing none of which had any economic value.

Maybe the fed should have just let the free market do it's thing. Maybe interest rates where high because risk was high. Maybe this country's economy was not ready to grow... maybe it needed time to apply the technology and innovation created during the 98 bubble in such a way that real economic value could be realized and then expanded upon.

I hope you could see how additional bingeing could just lead to deflation where the opposite occurs and the value of the dollar increases as there are not enough dollars to go around. The safest place to be?- cash under your bed spread.

Whoa let's not get all pesimistic- the world looks at U.S. (the perverbial us) as AIG , not too big to fail, but too important to Fail. The market goes sideways until growth catches up...
Only thing I have here is buy a covercall ETF (the simultanious owning of a stock and sale of a call option, it basically allows you to collect on option premiums with very little risk). Covercalls out preforms generally in every market other then a strong bull market.

There is always overaction, I am certainly not well versed in the fundamentals. I do enjoy the technical analysis of the markets though. Technicals tell me that this could get alot worst before it gets better. However in the past when this type of pessimism permiates through the masses and everyone tells you not to buy, then that is the best time to buy. At least that is what the greatest investors of all time have done... However I don't think mainstreet has really realised yet how much this could kick them in the head. I think mass's are saying don't buy, but secretly they are telling themselves, "give it two years, the markets always come back."

Waiting for the next shoe to drop? Lets make a like a tomato and catchup (did you know that the difference btw catchup and ketchup is the addition of tabasco, and less thickness). So the best scenerio is not really panning out.

Here's the worst case. Lehman! WOW! a firm with 158 yr history, a name that has stoked the fires and has forged this country's financial markets. A firm that survive the great depression, black monday, and the 1998 debt russian default/fall of long term is taking out by subprime. Subprime - my experience with sub-prime starts with bunch of young smooth talking sales people calling an under-eduatced demographic and pushing complicated loans (basically scams), wall street bankers pooling these loans into even more complicate bonds and selling them to pension funds, insurance companies (can anyone say AIG, from $70-$4 in 12 months flat), etc... Then credit agencies (moody, Standard & Poor), whom are suppose to be beholden to the interests of bond buyers, turn a blind eye. After all Wall Street firms are the credit agencies biggest customers. However if I have to assign blame I assign blame to the grand Pooba himself, Alan Greenspan (no he did not!). How can blame such a nice grand-fatherly man like Alan? - because he's an enabler. Back in 2002ish he reduced the discount rate to 1 percent for over a yr to avoid recession. Basically the economy (post9/11) was getting a cold, maybe the flu, and Alan desided to skip vitman C and go right for the defibulator pads and a adrenaline shot straight to the economy (ala pulp fiction). This year of cash on fire sale, got money moving and stoked the economy, but in what way??? - Was this growth healthy? In terms of sub-prime, No! In the most subversive way subprime was capitalize at it's most dangerous. In the end sub-prime funneled money from the poor, uneducated, and lazy to the corporate individuals. "Lets just refinance your house and save you a few hundred dollars a month." Never mind the balloon payment or the tricky language... in the end an old mortgage is paid off by the bank in order to finance a new mortgage (refiance). That old mortgage is linked to a bond in some pensions/mutual funds/hedge funds ("buyside") portfolio... That bond is paid off, leaving the pension fund with money and Wall street with a mortgage to create a new bond and sell to the cash laden pension fund, not to mention the deed and the house keys to some poor smucks half a double in about 9 months. Then the house goes to auction right about the time your buddy's from ameriq**st (subprime scumbags) and UBS want to a start a small real-estate investment group to pool money and get property on the cheap. Please show where any economic value to society in general was added...

Sorry I got 0ff track, so the firm formerly known as Lehman was holding 600 billion in debt (alot of it subprime bonds) while only having 20 billion in assets to back it up... That is a 30 to 1 leverage, this means if they even just missed price the bonds by 3% they are screwed. To risky, to greedy, poor oversight... it's just sad.

My Financial Notes for the week of 3/24/07 Please note: by no means is this a solicitation or recommendation of any security. These are my thoughts on financial markets put down in print in order to help ME organize my security selection process, gain insight into what the future holds, and analyze my past mistakes and successes. I am not a portfolio manager or trader. Although I work in financial markets (as an analyst for a financial data/ software company), I have absolutely no experience managing assets or portfolio risk of any kind.

The goal of this periodical is to evolve as a market operator through introspection. Indecision kills investments and trades. I will use this to help solidify my views on the markets and note the performance of those views.

Economy: The fed has taken some unprecedented steps to stabilize the economy. They have provided several rate cuts and infusion of credit; including very unusual (but not completely unprecedented) loans directly to brokerage arms of large banks and the acceptance of illiquid securities as collateral. Also worth mentioning was the FEDs assistance in helping JPM acquire Bear Stearns; and an odd interest rate cut, that happened out side the normal FED schedule. Some speculated this cut happened in order to prop the market higher just long enough to allowing for a Societe Generale trader to unload a 6 billion dollar loser with out causing ripples across the market. Some of this intervention causes the traditionalist, the Adam Smith-types, to call foul as the FED may be impeding the invisible hand of a free market system.

The recent events in the market leave me with a Sense of waiting for the next shoe to drop. Was bear stearns an isolated issue or just the beginning οf something much larger? I don't feel comfortable answering that question definitively yet. But I can start watching for the signals and the earmarks of either a soft landing or an economic free fall.

My best case scenerio...
Inflationary pressures caused by 6 years of rising comodities prices and a declining dollar begins to abait. The good news the US dollar, gold, and oil all hit the brakes started what could become a significant contraction late last week (time will tell).
There is some evidence to suggest that volatility (Market speak for fear or optimism) as of late has enabled speculators to push commodities like gold and oil to potential bubble busting levels.

Interventions of the fed were well played and instilled confidence in the market at just right time to prevent an overaction (at the cost of alittle inflation down the road). The stock market has rebounded abit and some very large hedge fund players are out raising capital to buy mortgage bonds on the cheap (suggesting a rebound in the credit markets). Earnings remain stable. The weak dollar reduces the trade deficit (around 7% year over year) and actually revives manufacturing (BMW announcedplans to open plants in the US).

My Worst Case Scenerio...