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Monday Morning Quarterback: The Fears of Those in the Know

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On Friday, we got word that the dynamic duo of Ben Bernanke and Hank Paulson were on the case.

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"The Autumn wind is a pirate blustering in from sea. With a rollicking song he sweeps along swaggering boisterously."

--John Facenda


It's December in New York and you know what that means. The first snowfall arrived in Manhattan, tourists are flocking to see the tree and performance anxiety is percolating on Wall Street. Yes, 'tis the season and it's suddenly upon us, with merriment and anticipation dangling like seasonal ornaments from each and every branch.

For those navigating the flickering ticks, this has been a particularly interesting juncture. We've got an 800-lb gorilla that is the global credit crunch to the left and elephants in the room in the form of central banks and government agenda to the right. They've been playing tetherball since the summer and the stakes continue to heighten as we edge into year-end.

We can talk about the socialism of Wall Street and what it means but at the end of the day, it's an academic (albeit extremely important) discussion. Investors want to know what the tape will do so they make their list and check it twice. How they play and what they're paid will go a long way in dictating the jingle in their holiday season jeans.

Last week, after a Monday sale that left the mainstay averages 10% below their peak-the conventional definition of a correction-the bulls found a bid and rallied in kind. The initial lift was a function of an oversold condition in the face of widely known risks and made a ton of sense in the context of a counter-trend bounce. The question, quite naturally, was whether it could and would continue given the mounting credit pressures.

On Friday, we got word that the dynamic duo of Ben Bernanke and Hank Paulson were on the case. The former opened the door for further rate cuts while the latter offered an aggressive plan to freeze rates to sub-prime borrowers and sidestep the adjustable-rate freight train. This, on the heels of the proposed super-conduit rescue plan, tells us all we need to know about the fears of those in the know.

For my part, after trading from the long side for a week or so, I punted my remaining rentals into Friday's gap opening and bought index puts as the S&P probed 1490. I'm playing smaller than normal as a function of my incessant schedule and looming unknowns but I will, as always, scribe vibe in real-time as my eyes see and my gut digests.

These are interesting times indeed, Minyans, so trade wisely as we fit the pieces together.


Minyan Maibags

Toddo,

At the MIM events you said (and I realize this is not verbatim) that foreign investment in the U.S. would make you more positive on the market. Does the recent investment in Citigroup (C), Bear Stearns (BSC) and now Activision (ATVI) show that foreign investors have figured out a way to invest in the U.S.? Does that change or modify any of your longer-term views?

Thanks kindly,
Minyan Jeff

MJ,

Excellent question and one that I've been talking about with those I respect. Best I can guess, the transfer of wealth could indeed provide a bridge but I'm unsure of how stable it is. It comes down to relative magnitude. The notion that foreigners can save US asset prices is a stretch but they can likely buoy them and, in select situations, absorb them.

I do find it interesting that we haven't heard a peep from the government regarding recent stakes in our financial institutions, which can be perceived as a positive (moving away from an isolationist mindset and thus sustaining the bridge) or negative (an act of desperation).

Either way, and to answer your question, I continue to have deep-rooted big picture concerns that we're in the early innings of a multi-year debt unwind but respect this latest twist as it relates to the timing of the comeuppance.

Best of luck,
Toddo

Howdy Minyans,

I just came across this study on the deterioration of the American middle class. Given that this is a frequent discussion point for many professors, I thought I'd share it. A couple points from the press release about the study:

  • Twenty-one percent of middle-class families have less than $100 per week ($5,000 per year) remaining after meeting essential living expenses. These families are living from paycheck to paycheck with very little margin of security.

  • More than half of middle-class families have no net financial assets whatsoever - that is, no financial assets or debt levels that exceed their assets.

  • Only 13 percent of middle-class families have sufficient assets to meet three-quarters of their essential living expenses for nine months, should their source of income disappear.


It's a pretty compelling read and, in the context of ongoing threads regarding the "haves" and the "have nots", I felt it would be of interest.

Cheers,
Minyan Alex


Random Thoughts


R.P.


Holiday Festivus is here! Come join us and support the Ruby Peck Foundation For Children's Education at an old-fashioned Southern-style hoe-down in the heart of New York City on December 7th. Click the image below to learn more!

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