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Freaky Friday Potpourri: Serenity Now!


Twists and turns arise as we edge into the final fifth of a freaky week


I've admittedly had CIT Group (CIT) on the brain of late. We channeled it on Monday, drawing attention to the parallels to American Home Mortgage, which was halted during a monster one-day rally in 2007 (much like we saw with CIT on Wednesday).

We circled back to it yesterday, drilling into two primary points, that of moral hazard (click here for a great take on that topic from Bennet "Blue Steel" Sedacca) and the issue of counter-party risk. Professor "Metro" Rife then offered that total CDS outstanding was roughly $57 billion but the net notional (unpaired risk) was "only" around $3.4 billion.

While there is a considerable "human toll"-one we won't for a moment gloom over-it's pretty clear "why" the government has drawn this arbitrary line in the sand. It's something we've discussed through the years and it's a point Minyan Peter recently drove home: "Too big to fail" simply means, "If the derivative counter-party risk will suck down the system, we have no choice but to channel Alec Baldwin."

Hands over eyes and upon reflection, they may be their only choice. We know that the only true medicine for what ails us is debt destruction and that must occur if we're to ever build a sustainable economic foundation. The toxic twist, of course, is the derivative-laced finance-based global economy, which is akin to policymakers playing Operation while being surrounded by an angry crowd.

We delved deep into the banking industry before the wheels fell off the wagon, warning they were technically insolvent (imagine doing that while they traded at all-time highs?) as we monitored cumulative imbalances that began to build at the turn of the century. I offer this context for this next set of circumstances, which are sure to soon set in.

The government knows the stakes and the world is watching in wide-eyed wonderment. The question now is whether they can successfully sift the winners from the sinners without provoking the wrath of a nation scorned before foreign holders of dollar-denominated assets finally scream "Uncle Sam!"

A smart man once said you can pick the direction of financial markets or you can pick the timing but you'll rarely nail both. As we continue to watch the world's wildest reality show in real-time, I will ask a few simple questions:

  • Is it getting better or worse where you live?

  • When will the distinction between credit fueled growth and legitimate economic expansion again "matter"?

  • Given the consumer is 70% of GDP, what do recent comments from Federal Express (FDX) and Dell (DELL) portend for end demand?

  • While news is always best at the top and worst at the bottom, which way is the disconnect between perception and reality currently skewed?

  • If it took seven years of historical excess and never-before seen financial engineering to create this crisis, is it realistic to expect it to end with a "V"?

I will again say what I said in Vail in 2006. As the CEO of Minyanville, I would love nothing more than to stand here proclaiming the dawn of a new economic expansion. My sense-and I could be wrong-is that when it's time to push your long-term chips on the table (as we did on a trading basis in March), being bullish will not only seem silly, it will feel downright reckless.

In terms of the here and now, yesterday's tape was digestive given the looming shoe at CIT and that's "hands over eyes" constructive. The overnight news-Google (GOOG), IBM (IBM), General Electric (GE) and Bank of America (BAC)-will add fuel to the fire but please don't lose sight of the forest while chopping down trees.

You know how I'm currently positioned (in a word, unprofitably) but every war is a series of battles and I'll fight the good fight through the lens of defined risk.

Good luck, Minyans, and remember that expiration and earnings make for strange bedfellows. Size your risk accordingly, think positive and remember to breathe.

Answers That I Really Wanna Know…

  • Has anyone entertained the notion that the reason Warren Buffett injected capital into General Electric and Goldman Sachs (GS) was because of Berkshire Hathaway's (BRK-A) counter-party exposure to those two firms? (By the way, nice trade WB)

  • With all eyes focused on earnings (fundamentals) and levels (technicals), will the other primary metrics (structural, psychology) emerge as the primary drivers of this next market leg?

  • If I've gone to the gym every day this week at 6:00 AM, ate healthy and drank "by appointment" only, how the heck did I gain weight?

  • A pimple on my forehead? At 40? Seriously?

  • Nouriel Roubini said yesterday that "the worst is behind us in terms of economic and financial conditions?"

  • Is that, coupled with Meredith Whitney's seemingly sudden bullish stance earlier this week-and I have mad respect for Meredith-really bullish or super bearish?


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