The Ex Ante Factor: BSC - REDUX
Saturdays update for TTC members.
We typically like to look forward in our weekly commentary as we believe the most important aspect of technical analysis is the ability to derive future fundamental conclusions. This week we couldn't resist revisiting the BSC piece we wrote last year the first week of July that basically warned of a credit market debacle based upon the deteriorating technicals of BSC stock price which due to them being the premier Wall Street mortgage trading shop was a proxy for the overall financial system. Recall that analysis of the potential credit/mortgage market implosion was at a time when many pundits and analysts were pounding the table on the world being "awash in liquidity" despite all the warning signs including the inverted yield curve suggesting money was too tight. These same pundits and analysts are now whining that the Fed is not doing enough to stem what is now a liquidity crisis. To paraphrase Buffett, just as we were fearful last summer as others were greedy, now we are opportunistically greedy as others are fearful.
That said; patience is crucial. In a holiday shortened week there are some major hurdles to clear (a perfect pun). In our opinion the following are the two most important issues facing traders and investors as we begin the week. How will they be resolved?
The NY Fed/JPM orchestrated bailout was not just about BSC or their balance sheet erosion and fears of liquidation of assets. It was about the whole financial system and the ability to access assets BSC holds for clients. A mass liquidation is not the biggest concern in our opinion (though clearly the Fed is trying to avoid this) as the mortgage market is likely discounting a majority of the potential supply. What the market is not discounting is the counterparty risk ripple effect. BSC acts as clearing agent for not only the hedge fund industry but also real money accounts and more importantly other large broker dealers across all asset classes. We know BSC was having trouble with their own counterparties which is reportedly what triggered the run on the bank. What is not being reported is the BSC customers and broker dealers were facing their own counterparty problems simply because BSC cleared their trades. We aren't talking about XYZ Bond Daddies down in Arkansas, we are talking about some of the largest financial trading institutions on Wall Street. Imagine the panic if we woke up Friday to see the market puking due to BSC going down and when as an institution you called your broker to trade he said they weren't in business today because they clear through BSC and no one would take the other side of their trades. That's potentially what was at stake Thursday night as BSC, JPM and the NY Fed's Tim Geithner (following in his predecessor, Bill McDonough's crisis aversion footsteps) arranged an unprecedented line of credit to fill client withdrawals. After the dust settles this weekend and as the auction of BSC assets commences, we should know Monday morning if it worked. We do not want to hear that a major broker dealer is closed until further notice because they clear through BSC. That's the ultimate counterparty risk nightmare.
On Tuesday the Fed is up to bat yet again with the FOMC meeting. I was debating one of my buddies regarding the move and he said the bond market chatter is they will ease 100bps. I countered that they should only go 50bps and stop. I argued that at 2.50% the Fed funds rate would be essentially at the Fed's stated level of inflation (core PCE deflator) and by lowering below the rate of inflation they would be in effect giving the green light to sell the dollar (arguably they already have). The weak dollar is the problem not the solution. It is decreasing real purchasing power and the real present value of assets. It is decreasing the real value of mortgage bonds and their underlying collateral. The only thing the dollar is increasing is the value of commodities and implied volatility. With foreigners ready to pounce on distressed assets but being burned by the first round of capital infusion, they likely will want to see the dollar stop falling apart before committing new funds.
Memo to Ben Bernanke: Stop Easing - We don't have an interest rate problem - We have a credit, collateral and confidence problem - The more you ease the more credit spreads widen and the lower the present value of the assets fall - A stabilizing currency will stabilize the spreads and put a floor under the value of these assets.
Now we know little but by Wednesday we will know much more. We recommend investors and traders to be patient, preserve capital and keep powder dry. Better risk/reward trades are in front of us.
If you feel the resources at TTC could help make you a better trader, don't forget that TTC will be closing its doors to new retail members this year. Institutional traders have become a major part of our membership and we're looking forward to making them our focus.
TTC is not like other forums, and if you're a retail trader/investor looking to improve your trading, you've never seen anything like our proprietary targets, indicators, real-time chat, and open educational discussions. But the only way to get in is to join before the lockout starts - once the doors close to retail members, we'll use a waiting list to accept new members from time to time, perhaps as often as quarterly, but only as often as we're able to accommodate them. Don't get locked out later, join now.
Have a profitable and safe week trading, and remember:
"Unbiased Elliott Wave works!"