Lying In Wait ~ The Risk Averse Alert

Friday, January 08, 2010

Lying In Wait

To begin the New Year we saw Banks rise 10% ... and with bullion up almost $40 the HUI gold index jumped 7.6% ... making these sectors #1 and #2 at the conclusion of 2010's first week of trading.

Were there ever a finer measure of investor "confidence?"

Sure, we'll throw money at these hopelessly under-capitalized, essentially insolvent enterprises, effectively playing the same game as typically is reserved for companies in bankruptcy — pure, unadulterated speculation on short-term price moves — but hedge we will!

Thus, "the House" lives by a 2.4% margin ... or, more accurately, for every 10 votes of confidence in the financial system there were 7.6 hedges put on.

Not surprising is so few people "get it." We have a Treasury Department that, via a Christmas Eve present delivered to the world, essentially telegraphed to investors buying GSE MBS that they had better buy as much of this crap as needed, or Treasury just might be forced to collapse the dollar and inflate the value of current holdings out of existence. In the real world there's a word for this: extortion. Such is what passes for policy in the United States of America. More to the point, private-sector fraud that led to a sub-prime mortgages becoming 20% of all mortgage issuance in 2006 has been fully transported to the public sector.

Then, we have a Fed whose largess effectively makes them a major investor in financial institutions, yet unlike the rest of the private sector, there is nothing forcing them to disclose their holdings for the sake of transparency. Why not? Because the extent of systemic insolvency need be concealed.

Yet one is to believe that, just because this most unhealthy circumstance passes today it will pass just the same tomorrow? Well, pardon me while I clear my gills!

Let's get something straight. By no means do we need a resurgent crisis to precipitate a sudden, sharp sell-off in the stock market. Indeed, absent any sign of recovery (which in fact is present reality), stocks can fall of their own weight.

Let me ask you something... Do you suppose there are a hedge fund or three building a modest long position over recent months, waiting for the lender of last resort to inevitably reach an untenable position, at which time a much larger short position which simultaneously is being built will find occasion for becoming profitable with help of long positions being dumped?


What do you think all this call option buying is about?

Oh, you think consensus is betting on a rising market ... and this while commercial lending spirals lower, small businesses — the engine of economic growth — show no sign of rebounding, unemployment continues growing, consumer credit relentlessly collapses, mortgage defaults increase among prime borrowers, and trade remains depressed with the risk of sovereign default still on the radar?


These call options are hedging larger short positions lying in wait.

Which is precisely how anyone with their head on straight should be positioned. Lying in wait...

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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