The Weekly Report

By: Mick P | Mon, Jul 7, 2008
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Welcome to the weekly report. This week we look at the Bank for International Settlements (BIS) latest utterances and look at the chart of a hedge Fund showing unusual price action. We start with a look at some "suggestions" made by the BIS in its 78th annual report. This is probably the most important global macro-economic pointer you will see this year that shows the way ahead:

Regardless of your current financial situation, be you rich or poor, none of the above is for your benefit. The BIS has formalised the discussion about how to save the Western World (and therefore save emerging and developing markets) and has heavily backed the centralised, government driven bail-out approach. Such action would see the end of a capitalist approach to markets, just when free markets are needed the most.

Let's be straight on this, the deleveraging we have seen since the summer of '07 is the natural consequence of prices being affected by a higher than expected level of risk occurring in the markets. It started with the reduction of banks willing to lend short term loans, commercial paper, to each other as the prices of the assets used to secure the loans began to drop markedly. Those assets were being re-priced lower to more realistic levels as the expected income they earned did not match the modelled expectations.

With a lack of short term loan facilities banks who borrowed short to leverage lending long found the business model collapsing. There were only 2 options left, either raise capital to allow leverage to continue or to stop the long term lending and reduce the amount of leverage in use. As we have seen over the past year most banks have attempted to raise capital by begging cash rich Sovereign Wealth Funds, Private Equity or cash rich Institutions to "buy" part of the bank, promising to pay usury rates in return. Or they have issued more equity, diluting share-holder wealth. This is what nearly all the banks have had to do. Some more than once.

The likes of Countrywide, Bear Stearns, a myriad of Mortgage Lenders and a whole bunch of Hedge Funds (Peloton etc) took the second option and stopped the process, or had it stopped for them by a market no longer willing (or able) to allow their business models to continue.

So here we are today, with Bankers wearing brown trousers to work to disguise the fear, the Primary Brokers looking directly into the regulatory future they dread and Hedge Funds hoping they have enough credit available to stay afloat. The actions taken by the Fed, Bank of England et al are now seen as "holding operations" allowing current practises to continue until the dawning of a new way, putting a line under the mess with a new paradigm that will define the next chapter in capitalism.

Whilst the "new way" is awaited, the de-leveraging continues and those invested in the Bank/Broker sector sell out on any rally. It is that chapter, the "new way" that the BIS started to outline. We should plan for the following events (if you think this is far-fetched, remember the reaction when the Fed started its "Facilities"?):

To read the rest of the Weekly Report, click here.

 


 

Mick P

Author: Mick P

Mick P (Collection Agency)
About Collection Agency

An Occasional Letter From The Collection Agency in association with Live Charts UK.

For some years now I have written an ongoing letter, using macro-economics, to try and peer into the economic future 6 to 18 months ahead. The letter was posted on a financial bulletin board to allow others discuss its topic.The letter contains no recommendations to buy or sell, indeed I leave that to all the other letters out there and to the readers own judgement. The letter is designed to make us all think about what may be coming, what macro trends are occurring and how that will affect future trends and how those trends will filter down to everyday life and help spot weak or strong areas to focus on for trading or investing.

To contact Michael or discuss the letters topic E Mail mickp@livecharts.co.uk.

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