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Friday, March 29, 2024

Leap Day

Of all the months to have an extra day in it, why did it have to be this one?

This has been a torturous month to play the markets and making us spend one more day in it is just cruel at this point.  I mentioned in last night's post how deeply concerned I am about the dollar's continued decline and when I see things like that I want to go to cash and I very much doubt I'm the only trader who feels that way.  Unless we see a recovery in the dollar, it's going to be very hard to make a good case for US equities as we are down 20% from last year in foreign currency

Of course 20% would be an ideal bounce zone but it's also a terrible level to lose and breaking 12,500 again is a pretty good indicator that we have another bottom test in store for us.  Let's hope we can hold it today as 12,500 is up 100 for the week and we'll take it, but we're not going to like it!

Asia sold off last night as Bernanke's comments yesterday about possible US bank collapses for some reason made investors a little uneasy.  The Nikkei gave up 2% and the Hang Seng dropped just 1% (still 260 points!) and Europe is trading off about a point as the Euro hits $1.52, getting close to a double over the past 6 years!    Now there is ample grist for the rumor mill and AIG's surprising $5.3Bn loss on an $11Bn write-down of mortgage securities is not helping this morning.

We have AIG in our virtual portfolios and we pretty much expected this so we're going to take out our callers and be very happy it was "just" $11Bn and the key phrase is: "AIG said the unrealized valuation declines aren't indicative of the actual losses the unit may realize over time. Any credit losses that do occur in future won't have a big effect on AIG's overall financial condition."

This is why we bought August and sold March!  While it is possible that there may be some more write-downs if the government continues it's do-nothing policies and the housing market continues to collapse, this represents a net $5Bn loss on AIGs $505Bn invested in credit derivatives alone!  AIG is a huge company with  close to $1Tn in cash and investments, of course they lost some money in CDOs – they wouldn't have been very well diversified if they hadn't!

Over in Europe, Swiss Re, who are similar to AIG, also took a $1.2Bn hit on CDOs and the lesson the world gets from this is, unfortunately, DON'T INVEST IN AMERICA.  RBS had the best scam this year as they aggressively went after US deposits, invested most of the money abroad and now owe their depositors 14% less in Euros than they took in last year.  While the bank did lose $1.8Bn in CDOs, they made record profits as they wisely cut back on personal credit loans last year. AXA also posted strong numbers despite $900M in write-downs.  While you can't completely escape exposure to US assets in a global economy, those that limited their exposure most lost the least.

To hammer that point home to European investors – Peloton Partners, a British hedge fund founded in 2005 by two former GS parners, is shutting down one of its funds and closing the other to investor redemptions amid losses managers described as "severe" due to mortgaqge investment losses. Yesterday, Messrs. Beller and Grant said in a letter to investors that they would be selling off the assets of their $2 billion ABS fund, which turned in a blistering 87% gain last year. They blamed a drop in the market value of highly rated mortgage securities in which the fund had invested, and moves by banks to ratchet down their exposure to hedge funds.

"We have been working night and day exploring every feasible option to alleviate the situation," they wrote. "In the end the best solution has been to seek buyers" for the fund's assets. Messrs. Beller and Grant lost about $120 million of their own money that was invested in Peloton, according to a person familiar with the matter.

Aside from Bernanke's statement that small, regional Banks may end up having to be bailed out by the FDIC, financials are selling off as Senator Jack Reed, Chariman of the Senate Securities Subcommittee, has suggested applying rule 46-R, a rule meant to stop Enron-like balance sheet abuses, more strictly to banks and their "off balance sheet" assets.

After Enron, with Sarbanes-Oxley, we tried legislatively to make it clear that there has to be some transparency with regard to off-balance-sheet entities.  We thought that was already corrected and the rules were clear and we would not be discovering new things every day.

Despite all this mess you just can't seem to keep the US consumer down and Consumer Spending jumped 0.4% in January, outpacing already inflationary income growth by a full point.  Unfortunately, adjusting for inflation, spending is actually flat and the market is in no mood to look on the bright side of an economic report today.  Even the PCE index, which the Fed actually does agree is a pretty good inflation gauge, is showing 3.7% year over year growth – quite a bit more than the 2.2% "core" CPI the government likes to cling to.

To summarize the last 2 day's worth of data:  0.6% GDP = STAGnant economy and 3.7% PCE = inFLATION.  STAGnant economy + inFLATION = STAGFLATION!  Very good…  Next week we will discuss the situation we find ourselves in when the FUndamentals start to suCK.

Have as good a day as possible!

 

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