Trading Note. Approaching our SP Futures Target of 810

We were looking for 810 to the downside and have been riding Index doubler shorts down since yesterday afternoon in our trading portfolios. We make changes to our investment portfolio only a few times each year.

Now we are buying some long positions to offset those shorts since we approach a possible support area.

The longs are individual stocks, precious metal miners and oil producers with strong cashflows and/or dividends, and some of the long index funds.

Please note that these longs are MORE than offset by the remaining short positions. This is a hedged play to take some short profits off the table without necessarily selling them. If we get a rally from here it will be relatively easy to reduce the three short positions. The longs are more diversified so obviously there are many more positions, but less in total dollar and leverage value. We are trading without margin.

We'll have to see how we close and what happens as we approach 800 if we do. If we go lower tomorrow we can adjust the long-short balance in the portfolio to take advantage of the decline.

Recall that we are in an option expiry week, and we have expiry in some of the commodity futures as well.

We offer the occasional example of how we might be trading a market not for specific examples or 'calls' but rather to reflect the style and money management we are using to match the character of a particular market. This one needs a whip and chair. Use of uni-directional positions and leverage are particularly dangerous since even in a bear downtrend, there is room for enormous swings even intraday.

Today did seem a little 'climactic' but it is too soon to tell.

Have a pleasant evening.

What Happened When They Pulled the TARP Out from Under the Mortgage Asset Markets?

The mortgage markets are imploding.

This is not the sort of action we might have expected given the panic story that Hank and Ben presented to Congress when they originally asked for the emergency $750 Billion to immediately buy troubled assets to 'save the system.' Well, from the looks of these charts those assets have become a lot more 'troubled.'

On the surface it appears as though they have washed their hands of the larger financial system, particularly the mortgage markets, after they supplied a select group of banks with no-strings equity investments.

Paulson and Bernanke need someone with experience in crisis management on their team. At this point the broader market can trust nothing that they say since it is inconsistent, opaque, and without principle to the point of seeming arbitrary. Suspicion of favoritism and insider dealing is clouding all that they do.

Bill Poole Thinks the Fed is Confusing the Markets with a Lack of Transparency and Clarity of Intent

The ABX indices are based on credit default swaps (CDS) for tranches of subprime mortgage-backed securities(MBS).

The CMBX is a Commercial Mortgage-Backed Securities credit default index. CMBX is quoted as credit spreads, whereas ABX is quoted as bond prices.

The Dollar Trap Part II: Mutually Assured Financial Destruction

The current structure of the remnants of the Bretton Woods agreement with the US dollar as the dominant reserve currency is not sustainable unless the rest of the world is willing to accept a form of neo-colonialism.

The developed nations are holding approximately 70% of their reserves in US dollars.

The rest of the world knows it must find an acceptable substitute for the dollar as the reserve currency.

The US does not wish to change the status quo for several reasons.

First, it provides an automatic funding mechanism for incredibly large budget deficits that would collapse without this mechanism.

Additionally, the US economy has become badly distorted, with an outsized financial sector as a percent of GDP created to manage its artificial reserve construct.

Change will be painful for all. Yet change must and will come, even as the US resists that change and uses a type of Mutually Assured Financial Destruction policy to maintain its hegemony.

No one wishes to make the 'first move' to the exit, since it will cause a severe depreciation of their dollar reserves, and possibly provoke clandestine and military action by the world's sole superpower.

And yet, the inching to the exits is underway, and the world holds its breath in case a shift occurs that will precipitously unravel 37 years of financial imbalance in a global economic earthquake.

The dollar will either be saved with a new formal structure, with more fiscal and political overtones to support an otherwise unstable monetary regime, or it will be decimated.

It would be naive to think that the US financial planners do not see this and are not using it to their advantage.

One can always count on a reversion to the mean. We just cannot know when it will happen, or how, or in what period of time.

When it comes it will come quickly like a lightning strike, with a terrific thunderclap heard around the world.

US Debt has grown to be about ten percent of World GDP (excluding the US) which is without historic precedent.



Approximately thirty percent of US debt is being held by non-US entities, in particular foreign central banks.



The Developed Countries are holding approximately 70% of their reserves in US Dollars. The Developing Nations have less exposure on a percentage basis.

Above Charts from "Is the US Too Big to Fail?" by the Reinharts at VoxEU


Total US Dollar Credit Market Debt Now Stands at 350% of GDP. This cannot be sustained. Certainly a certain portion of credit will be written off in defaults. But notice that the strategy of the US is not to make structural reforms but to try and restart the debt creation engine. This will require continued subsidies from foreign sources with waning appetites for US debt that can never be repaid.



Above chart courtesy of Ned Davis Research.