Fundamental Trading Diary

Fundamental analysis of the capital markets

Fannie Mae & Freddie Mac

This is probably the most blogged about topic in the financial blogosphere….  I won’t get into whether I think the intervention is right, will work or will make the housing and credit markets more stable.  What I will get into is another mid-to-long term shift in supply and demand.  Bill Cara calls it a tilt.  I’ll quote him liberally:

Yesterday, PIMCO’s Bill Gross was pleading for help from the Administration. However you paint this picture, color it yellow. Bill Gross represents Wall Street, so this is another case of Humungous Bank & Broker pleading for Intervention, a tilt in that so-called level playing field that would help HB&B.

Every time that tilt happens, the $USD sinks. Presently, the $USD has been on a powerfully bullish run, which has been tanking the commodity prices. The Administration has been touting the positive impact that is having on the US economy; yet the data does not confirm that. Traders have been selling off the Energy, Financial, and Tech sectors because they now clearly see that the US economic problem is a global problem. As other currencies have dropped, the $USD has lifted. But there is a limit to how far traders are prepared to push it higher, knowing that US banks, broker-dealers, insurance companies and hedge funds are likely to fail soon.

As Bill Gross mouthed his plea in the direction of Washington, he was signaling “Get set for tilt”. Yes, we are that much closer to a bottom in precious metals. As I see it, traders with a three-year time horizon can buy Gold with a 7-handle and Silver with a 12-handle and do well over that period.

Bill Cara’s Commentary for September 5

I think he’s absolutely right this time.  He’s definitely been a bit quick to pull the trigger on the precious metals, but there will be more dollars chasing less precious metals because of this bail-out.

As for my positions initiated just before noon on Friday, the Japanese open has treated them very well.  All of my positions are well up:  EUR/USD $575, Oil $137.50 and 30-year bond short $296.88.  This, I suspect, is only the beginning.  I don’t intend to ride this horse forever, but I think we’re talking about a few percent gain in oil and euros, and maybe a 5-10% drop in the yields.

Money from the capital markets is made from either identifying short-term mispricings as information expires, or finding economic surfaces which are tilted – so the money runs down.  This is the catalyst for the latter action.

What we have to calculate now is exactly how much this will cost, and then we can estimate the monetary impact and decide where to exit our positions.

Update 09/09/08 7:57 AM: I’ve exited out of my EUR/USD and 30-year bond futures trades with a modest profit, and entered new positions in gold & silver futures.  I’ll exit out of oil on New York open.


September 7, 2008 - Posted by | Uncategorized

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