After a wild day like today you might think that many people would be
rethinking their positions. We do, otherwise we would be foolish and stubborn.
And that we are not, we have a wide field of vision and study everything very
carefully. Even after today’s incredibly crazy day in the market, our long term
bearish view remains the same.
Every day that passes we look at what is happening in the economy and the
markets. It is true that recently the markets have acted in a way that almost
defies all common logic. This sentiment is not only ours, but numerous other
professional traders whom we read their views also share the same amount of
frustration in trying to understand what is happening. The dynamics of the
market today were so wildly divergent it made almost no sense whatsoever.
Yesterday, Moody’s announced that they were reviewing the bond insurers for a
credit rating reduction, and they noted that a credit rating drop would be the
likely outcome. Today, Standard & Poors, the other big ratings agency, came
out and cut the bond insurers, beating Moody’s to the punch. So we now have
Fitch and Standard & Poors who have downgraded the bond insurers with
Moody’s saying they are likely to do the same soon.
Estimates of how much money is involved with the ratings downgrades varies
greatly. Anywhere from $500 Billion on the low estimates all the way up to
Trillions of dollars on the high side. Which ever it is, it is still a
substantial amount of additional losses that holders of bonds and other asset
backed securities are now going to have to deal with. And the Federal Reserve?
Just how long can they keep pouring money into the top to have it only crapped
out the bottom? In essence the financial institutions and banks have constant
diarrhea. Money goes in one end and just flows right out the bottom. That does
not sound to me like a healthy financial system. Banks and other financial
institutions will now need to increase their loss reserves in light of the bond
insurer downgrades, and we may even see more companies trolling for capital.
Well, Ben Bernanke was right about one thing, he has been urging financial
institutions to cut their dividends and continue to raise capital. I guess he
probably knew the bond insurers would eventually get their prized AAA taken away
from them. We knew that the losses would continue to mount irrespective of the
bond insurer downgrade. But, now that they have been downgraded the losses will
mount even higher. I expect to see the non borrowed reserves to surge upwards in
the coming months. That means even more money from the Government will have to
be poured into the top again.
One thing the Federal Reserve can say that is true, they have restored
liquidity. Just as the banks and financial institutions are experiencing their
constant diarrhea the toilets are flushing like mad.
