Sunday, March 16, 2008

Let’s hope foreign investors don’t bolt

It wasn’t too long ago that Bear Sterns was trading at $100 and I was in the money about $20 on a number of put contracts. I took a very nice profit because I couldn’t really tell if BSC was broke or going to be fine. Joe Lewis had just invested 1B and the Chinese put in another 1B. They had access to the books and I only had my gut that told me that Bear was riddled with terrible risks that they didn’t understand. Today JPM bought Bear for $2 per share and Lewis and the Chinese have lost their B’s in a short 120 day timeframe.

Asia is tanking tonight and Europe will follow. The rapid BSC decline is scaring the beejesus out of investors. How can you tell who will be next. It could be JPM! I doubt it, but we don’t have a true picture of any financial institution. Financials will get killed and the talking heads that have told people to buy because the banks are so cheap should be shot. How can you recommend a purchase when the balance sheets don’t even tally all the risks? Managers, directors, accountants, investment bankers, and stock hypers have really done a terrible job. The only place to be near a financial is short the ETF’s.

The Fed will continue to lower short rates and target their financing. The lower short rates are necessary to allow the damaged banking industry to borrow short and lend longer at a decent spread and hopefully earn their way out of this mess. But this will continue to hurt the dollar and foster an eventual demand for higher rates on the longer side of the interest curve. If foreign buyers flee the US bond market as well as the stock market, we may get higher 10 year rates soon.

I’ve been hunkered down, should have hunkered more, and can sleep nicely at night. When the next Fed inspired rally moves stocks up I will continue to lighten up. As i’ve said before, I want to have the ability to buy as things get worse and it sure seems like they will. The bankers will continue to lead us downward.

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