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Freaky Friday Potpourri


Boo landed a roundhouse right yesterday and sent Hoofy reeling against the ropes.


"I haven't seen a beatin' like that since somebody stuck a banana in my pants and turned a monkey loose."
Vegas Vacation

Good morning and welcome back to the Freaky Arena. After a series of clenches and breaks, Boo landed a roundhouse right yesterday and sent Hoofy reeling against the ropes. As most of the crowd sat there stunned, the proud bear pranced around the ring with a knowing look and new-found confidence.

"Sub-prime wasn't contained," he said under his breath as he glanced to the executive suites where Hank Paulson was watching the fight, "sub-prime is far from contained." Indeed, it's been the bearish bent that the pebble in the pond would ripple far beyond the niche nuances of the credit markets.

And now it has.

As the liquidity spigot seizes shut-a dynamic that is unknown in terms of longevity-investors are being forced to reassess their risk profiles. That implies different strokes for different folks, from credit to equity to carry-trade players-and it's a delicate dance in the context of an interwoven, credit-dependent financial fabric with upwards of $500 trillion in underlying derivatives.

We've long talked about these conditional elements in the 'Ville but the dog, it seemed, had no bite. That lens lost credibility as a function of absence and conditioned complacency set in. Volatility, already depressed by liquidity, was pressed lower by income-funds looking for dimes in front of the bulldozer. The compression has been stealth, but it's been cumulative.

The unfortunate truth is that many risk managers are unfamiliar with violent volatility. If Bear Stearns (BSC) can morph two funds from heroes to zeros, we can only assume that less seasoned salads are getting tossed. We knew that the weeks after the second quarter would be big (as investor letters made the rounds) and war stories continue to trickle into the marketplace.

Now, to be fair to the Matador Crowd, some context is necessary. The S&P is a scant six percent from all-time highs after a 94% rally off the '03 lows and the lift from those levels has been without major disruption. Couple the prevalent bovine psychology (the market broke out last week!) with the aforementioned complacency and voila, you've got a situation that feels much worse than a snapshot would suggest.

Perhaps many of the pundits pounding the table are right. Maybe this is healthy. The truth is that I'm not smart enough to know. What I do know is that by the time the evidence of "something more troubling" shows up in economic figures or is reflected by earnings, the market, as a forward looking discounting mechanism, will have already baked it into price cake.

Hear everyone but listen to yourself. At the end of the day, the thrill of victory or the agony of defeat is for you and only you to define.

Some Random Thoughts as we bring the swings home…


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