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Monday Morning Quarterback: Choking Up On The Risk Bat


...there are two sides to every trade and we would be wise to remember that we're entering a seasonally strong stretch.


"You don't know when to quit, do ya Griswold? Here's an idea: Why don't you give me half the money your were gonna to bet, then we'll go out back, I'll kick you in the pants and we'll call it a day!

Marty the blackjack dealer
, Vegas Vacation

Good morning and welcome back to the flickering pack. Fresh from the Trader's Expo in the City of Sin, where President Fish and I represented the 'Ville and kept a close eye on Hoofy and Boo, we turn our eyes to the tape as we ready for the official start of the year-end stretch. There's lots going on and much to discuss so let's leave literary structure alone and dive into the deep end of the pool.

The Minx grinded out a gain last week but you gotta pay your dues if you wanna sing the blues and know it don't come easy. To wit, we've seen a litany of negative catalysts percolate including:

  • Continuation of the credit contagion and mortgage mess, with some loss estimates approaching upwards of $400 billion dollars. There is a camp that continues to view this number as a non-event in the context of the global economy (likely the same folks that argued that sub-prime was contained) but, with upwards of $500 trillion in derivatives weaving together the world, the ripple effects remain largely unknown.

  • The dollar, which continues to sniff at multi-year lows. Through the lens of "asset class deflation vs. dollar devaluation," this may be necessary for continued jig across the continuum of supply/demand (although, as we know, it's no guarantor of such). Dollar bills, er, bulls should be careful of what they wish for, however, for if we see a greenback snapper, it could come at a considerable cost.

  • The Fannie Mae (FNM) accounting mess is now center stage, with the stock price down 40% peak to trough in the last month. Given our longstanding concerns regarding Aunt Fannie, this is akin to stepping away from the table and watching someone else run a string of blackjacks at the seat you once sat. From a completely unselfish perspective (my apologies, Fannie and I have a bit of a "thing" going) and given the leverage they employ and velocity (of money) they provide, the ramifications and implications of this evolution are potentially profound.

  • You may remember us talking about the 3-D dilemma (dollar, debt, derivatives) for a long time. This is playing out now, unwinding some of the cumulative excesses that have built through the years. While there is tremendous risk left in this complicated concoction, the question is quite simple if only anyone knew the answer: containment or contagion. The simple truth, however, no matter what anyone tells you, is that nobody-not Hank Paulson, not Ben Bernanke, not LLOYD! Blankfein, not any television prognosticator and certainly not I-can possibly forecast the depth, velocity or timing of such an intricate mix.

  • Looking through the lens of our four primary metrics, the tape has more issues than my therapist. Technically, we're "broken" below S&P 1490-1500. Fundamentally, earnings didn't live up to expectations (with FedEx (FDX) and Lowe's (LOW) offering fresh evidence of a slowdown). Structurally, well, we've talked about the tightrope and the collective psychology still seems resistant to the notion that it really could get that bad.

Now, there are two sides to every trade and we would be wise to remember that we're entering a seasonally strong stretch. What's more, "recession," "write-downs" and "risk" seem to be getting more play in the press, including recent covers of the Economist and BusinessWeek, which have proven themselves to be contrarian indicators of economic cusps.

While I've been wary that "the probabilities of a prolonged socioeconomic malaise are higher than most folks have factored into their risk assumptions" for a few years-and old school Minyans know that I'm always early-I continue to fear that the possibility of something more depressing than a recession is afoot. The question, as always, is one of timing and, in that vein, I continue to operate under the three-pronged mantra of capital preservation, debt reduction and financial intelligence.

For me, that means choking up on the risk bat, keeping dry powder and surrounding myself with the Minyanville community as we find our way. This world, and by extension, the markets is far from easy and there are no blanket answers or lay-up trades. Take a deep breath and digest what's on your plate before you swallow more risk. It's a mad, mad, mad, mad world but it's not impossible. We simply have to be patient, disciplined and aware.

Random Thoughts

  • I enter today's fray with a dose of Morgan Stanley (MS) puts and will continue to trade around them (it's "churning" under $60). The financials remain the chief stain of pain and if the "as goes the piggies, so goes the poke" plays out, we just might see the Hump Back Market kick in.

  • True story: On the last hand of my last shoe, I tossed a meaty bet on the table and drew a pair of aces. I split 'em, and pulled another ace. Split them, and pulled another ace. What did I draw? A two, a four, a four and an eight. It was a tad tenuous until I saw the dealer flip the jack that busted her hand.

  • The bulls are talking about these sovereign funds as a potential "out." I continue to believe that there's going to be further transfer of wealth but A) that's only a partial solution and B) it potentially has political handcuffs on it.

  • Gobble Gobble and be on the look-out for increased volatility as the week wears on.

  • Shareholders in the securities industry are having their worst year since 2002, losing $74 billion in equity. That should jibe well with the $38 billion in bonuses that are expected to be paid to the Street.

  • Festivus is shaping up to be massive, just massive, with the Minyanville human capital stepping up on center stage. Spots are fading faster than a pair of jeans so if you have an interest, please consider this to be a friendly Minyanville reminder to lock your spot.

  • My, look at the time. I'll see y'all over on the Buzz!


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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