|The Wood Shed|
By Todd Harrison JUN 27, 2007 10:02 AM
...a falling tree--or price, as the case may be--isn't firewood unless someone is there to chop it up and collect it.
"And a new day will dawn for those who stand long and the forests will echo with laughter."
Thanks again for a wonderful site. Just thinking out loud here. Leverage in a true market is one thing. But the subprime "space" is not a market. You have to be a member of the club to play at the club. Only until someone like Merrill (MER) comes around and shines light on it does it become a market.
I can't short this. Can you? If there is no market, the fundamental premise of investment is not valid. In fact, one could say that the bet that these participants are making is: it never becomes a market. The investment is premised on the club staying private.
Once the doors are open, the underlying investment thesis (regardless of the instrument) goes out the door. It's not just leverage – it's access. Or, at least that's how I'm viewing it.
You hit the nail on the head in that a falling tree--or price, as the case may be--isn't firewood unless someone is there to chop it up and collect it. And even so, it won't lead to a forest fire until someone lights the match.
The tricky aspect of this juncture is that everyone knows where the wood is now. And the wood dealers, who were quick to realize gains when the underlying assets were appreciating, are hoping that the spark in the dark (that is mark-to-market) doesn't come to Bear (pun intended).
I'm not smart enough to say whether this is the beginning of a big blaze. What I will say is that we've been discussing these conditional elements for a mighty long time.
In a finance based economy, one woven together by hundreds of trillions of dollars of derivatives, you don't need to be an investor in CDO's to get burnt. You simply need to be in a neighboring town.
And that could be a problem in our current era of globalization.