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What? You're not filthy, stinking rich? :))
Thank you for the answers and for taking the time to share your opinions
Earl.
I'm going to hang my investment hat on seasonality but be cautious.
I'm 60% cash right now and can be nimble if the underpinnings begin to
shatter. I spent a good deal of the summer mostly short so I have
no aversion to going short but I just can't bring myself to do that in
the face of the seasonality history. Also, banks and mortgage
holders have already been hammered in the markets and I am avoiding them
completely at this time. It's possible we can both be right based
on what we are long or short and hopefully, this will happen.
Thanks again,
Bob
At 08:43 AM 12/10/2007, you wrote:
If I had really good
answers for these questions I would be filthy, stinking rich a year from
now. So much is uncertain that I'll just have to make some educated
guesses.
1) Value for S&P. I
think that the SPX is highly valued now and that earnings are going to
decline at least 10% so 1,200 is probably in the ballpark. If we have a
recession, and I believe we will, declines often run 30-40% from peak
value so that yields 1050-900. The sovereign wealth funds are going to be
a new factor so I think that may provide better support. On balance,
around 1,200.
2) The world economy is
now built upon exponential leverage of debt. Not just mortgages, but
credit card, autos, home equity, CDO's, CLO's, SIV's, ABS, you name it.
Something which has not even surfaced is the leveraged counter-party risk
when counter-parties start defaulting ... the modern day equivalent of
the 1980's "portfolio insurance" which was thoroughly
discredited in the 1987 crash. I think that the global financial system
will get it worked out but it is going to require time, lots of time, to
find where the crap and the weak hands are and clean it up. I don't think
there can or should be an instant "fix".
3) Problem with the
credit system is shrinking liquidity. Credit holdings can not be valued
due to the way credit has been sliced and diced (horizontally and
vertically) and then securitized. Not knowing what is functional and what
is not, everyone is hoarding cash. That is taking liquidity out of the
financial system much faster than the Fed can add it. A low FF rate will
do no good if no one wants to borrow.
I am about 65% cash
now. I expect that the 1Q earnings reporting season is going to see a lot
of downward revisions and a lot of crap being written off the books to
clear the decks and get the problems behind. I hope there will be some
real fear and loathing in the market at that point. I expect that write
downs in some of the better financials may (eventually) be proven to be
excessive leading to future gains. 1Q won't be the end by any means but I
suspect it may be shopping time. If not 1Q, then 2Q.
Earl
From: realtraders@xxxxxxxxxxxxxxx
[
mailto:realtraders@xxxxxxxxxxxxxxx] On Behalf Of BobsKC
Sent: Sunday, December 09, 2007 6:17 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: RE: [RT] Trading Diary: False Breaks Warn Of A Market
Top
At 07:37 PM 12/9/2007, you wrote:
The problem is not a
few sub-prime borrowers being unable to refi homes which they should not
have purchased, the problem is that the credit markets are dysfunctional.
So what is the correct level for the S&P in your opinion?
Obviously, it isn't zero and equally obviously it isn't where we are now
so what is, (in your opinion), the correct index level for the current
conditions?
Second question: What do you believe needs to be done to cure the
problem? We are beginning to see the depth of the sub-prime problem
so that is coming into focus but what else needs to happen so the credit
markets can become functional again?
Last question: What do you see as the functionality problem with
the credit markets? Is it business capital availability or consumer
credit or both? Consumers have been living on credit cards for at
least 2 decades so there is nothing new there but they have less access
to additional mortgages due to falling property values. One of my
credit card companies just raised the credit limit on my account to
34,000 and I have no balance and have never asked for an increase so it
seems they aren't limiting anything to credit worthy customers.
Thanks for your time and insight Earl,
Bob
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