Wednesday, December 05, 2007

Winter Rules

You gotta be kidding me. As a reminder that you're never that far away from socialism and state control, our Bush administration - yes the neo conservatives - have decided to attempt to freeze current arm rates for solvent subprime borrowers for the next five years. Now that's a serious mulligan. Judge Smails would be proud.

This effort, combined with the recent SWF purchase of some Citi stock and a Treasury market that seems to be making a huge bet that rates are coming down, seems to have encouraged some risk taking. Of course, we're not sure how much of the total mortgage mess this effort would address, and it's only likely to prolong the day of reckoning.

By my count there is still a ton of over-rated paper hidden in the books and the writedowns should continue for some time. Equity dilution and dividend cuts are starting to come from some big names - Fanny and Freddy - and we have yet to address the capital base of the bond insurers. Finaly, the lawyers have barely started what promises to a be long and deep litigation cycle against the ratings agencies, the originators (what ones are left), the bond insurers and of course the I Banks.

Good old RR has called the Dow Theory bear market, so how do we make money? I think focus number one is non-China Asia: great balance sheets for companies and countries, not to mention consumers, undervalued currencies and a fast expanding consumer market. I don't have enough intel to get into the decoupling argument, but I think its fair to say it's not as bad as it used to be. Japan, Indo, Thailand, Malaysia - all look good.

The great questions of decoupling and the extent of the US slow down are the biggest unknowns. It seems clear that as the US consumer slows, the rest of the world will feel it. So it's a matter of degree. Right now, I guess I'm looking at individual trades to make some money until we get some greater clarity. I'm long some CROX on the oversell. I doubt I'll be there past mid December. I'm still trading SKF on what I think will be more volatility in the financials. On rallies, I'm short the indexes until DTL says different. But mostly, I'm in cash.


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