Tufar on Finance and Economy

Congress voted against the plan, Dow is down 777 points, end of quarter is coming, hedge funds face huge redemptions. When is it going to end?

VIX

INDU

A mortgage securities resolution trust is established. Short selling is prohibited until Oct 2. A flight from money market funds was observed, so the plan also insures main capital and not the interest of money market funds deposits.

Though the plan bears moral hazard, it is touted as the laset evil compared to what would have happend otherwwise: a total economic collpase with a total withdrawal of credit and finance.

3-Month US Treasury bills hit the absolute low record of 0.06% yield. Investors lost their faith in equities and flee to safety in treasuries, almost zero yield notwithstanding. What drives them? I have no idea. Good time to sell them if you have any.

US Treasury 3-month Bills Yield

Yesterday, Lehman Brothers filed for Chapter 11 bankruptcy and Merrill Lynch got acquired by Bank of America for $50 billion all-stock transaction.

The Demise of Lehman Brothers

Financial Times reports that Russian companies face $45bn backlog to be paid or restructured before the end of the year. Cost of refinancing and borrowing for Russian companies increased by 2-3 percent due to political risks.

Meanwhile Russian stock market is being decimated and lost half of its value in last 3 months! Russian indices are in freefall and recently government announced that it is contemplating using Russian sovereign investment fund to stop the fall of share prices.

While it is an incredibly short-sided idea, there is some merit to it since no other measure can stop the fall. Also, monies from sovereign fund will be necessary to help Russian companies pay back the debt to foreign banks.

Russian sovereign fund is held not in cash but in government bonds so that it would bring profit while it lies there idle. They are spread between US, European Bank and UK treasuries but for the simplicity we will assume that they are held in US treasuries, half of trillion of them.

So, soon Russian government will rush to the market to sell half a trillion worth of treasuries. As we all know too well, a world-wide liquidity crisis is ravaging for the good part of the year. Selling half-a-trillion worth of treasuries for hard cash is going to be a difficult task.

Furthermore, as it is usually happens, Wall Street broker houses will be waiting for this move of government of Russia with an eager anticipation. They are getting wet at the mouth at the idea that Russia will have to dump this amount of treasuries on their market all at once. They will agree among themselves and keep the prices of treasuries artificially low. Then, after buying them, they will turn to the Fed discount window and borrow hard cash to pay the Russians. They can do it against collateral of treasuries, thanks to the extended lending rules announced in March. Well played Wall Street, well played indeed.

What can Russia do? Sure, they can go to China or Saudi Arabia, or any other dollar-rich country to sell US treasuries for the hard cash. But I doubt that these countries would pass the opportunity to profit handsomely even like their Wall Street colleagues.

Russia is cornered and by the New Year it is going to lose almost all of its foreign currency reserves: it is going to be spent on paying back the loans. The Russian Stock market will collapse, Russian economy will collapse. This is the cost of war and aggression on Georgia.

Well played, indeed, well played.

It finally happened, government is all but takes over Fannie May and Freddie Mac. Shareholders are wiped out, government will inject liquidity, take over the management and gradually unwind the investments until the entities dissolve.

It was expected, Fannie and Freddie could not survive by themselves. This may mark the end of banking crisis of 2008, a definitive bottom and a start of recovery. Why? Because there is nothing else to fail. When there is nothing els to go down,  the only way to go is up.

I spent all August following Russia’s aggression towards Georgia and could not dedicate as much time to the markets. Nothing has moved in the markets in August.

As we came into September, price of oil fell, dollar strengthened, euro collapsed, commodity and fertilizer companies got decimated. China, which drove commodities surge, is submerging into recession.

But, do not fret; September is historically a losing month. This fall is a good opportunity to load up on shares and be ready for September surge.

Jim Cramer says that this 5-day sell-off was due to hedge funds redemptions that have to be honored within five days of application (September 1)

S&P 500 Seasonal Pattern

S&P 500 Seasonal Pattern