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Thunder Road For Credit Default Swaps


CDS spreads putting the pressure on equity.


"You can hide 'neath your covers and study your pain, crosses from your lovers throw roses in the rain." --Bruce Springsteen

I hear ya Boss, it's smellier than a post-sauna armpit out there, with CDS spreads across the spectrum--banks, life insurers, General Electric (GE)--poppin' in kind. We're talking biggest of the bigs, Minyans--Bank of America (BAC), Citigroup (C), JP Morgan (JPM), Wells Fargo (WFC)--and that continues to pressure their equity brethren.

If you were a credit bear, why wouldn't you press your bets? The sense on the Street is that the government will backstop your bets (thereby reducing counter-party risk) with the burden borne by tax-payers. The irony of ironies is that when they pushed for the first traunche of the trillions of dollars in stimuli, they warned that if we didn't do it, we would see... well, what we're seeing now.

And you wonder why people are pissed.

We're dangerously close to entering six-handle status in the S&P and that's where my bovine antennas start to vibe. Please note S&P 600 is where the first quarter of my long-term nest egg goes to work but I'm actively eyeing (not forcing) near-term opps as well.

With the S&P at 700 (right into the close) I made some small out-month call option nibbles in Boeing (BA), Intel (INTC), Research In Motion (RIMM), Ultra S&P (SSO) and BHP Billiton (BHP). Nothing crazy, mind you, but placeholders in front of Turnaround Tuesday (until it stops working).

Pep made a good point on today's Buzz about adding exposure as a function of price and that stylistic approach is an option (if you sync your time horizon and risk profile). The natural caveat is that being a bit early can be a lot costly so be careful not to deploy all your capital at any given price.

Finally, lemme say this--people are ANGRY (for good reason) and that lends itself to societal acrimony, social unrest and potential geopolitical conflict.

Please be careful out there and whenever possible, do your part to diffuse the situation, either by actions, words or a simple smile. It's not easy, but it's necessary.

Now, more than ever.


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