Vad's Best Ideas

The move to cut discount rate on the part of the Fed is surely going to attract a lot of attention. Hundreds of experts around the world are going to weigh in and speculate whether this move encourages the speculators or whether it could actually save the world economy from almost unescapable recession. (I will present my thoughts on this in the next few days)

But the short version is as far as I am concerned this move was fully warranted. The fact Federal Reserve has cut the discount rate rather than the Fed Funds rate means that FR agrees with what most of the hedge funds are saying- current market turbulence is driven not by fundamentals but rather by liquidity fears and simultaneous deleveraging. Banks and other financial institutions are simply afraid to loan each other money because no one is sure any more what counterparty's risks are. Hedge funds on the other hand got caught trying to exit the same positions and thus only exacerbated the volatility while losing their shirt in the mean time. However, the smart money should be buying subprime debt and not selling. One of the greatest opportunities ever to profit is unfolding in the debt market before our eyes and my belief is that shrewd and bold players will make fortunes buying CFC's and TMA's debt at deep discounts. This how the huge fortunes are made! I wish I had a few millions to invest right now:)

On the unrelated matter -while reading foreign newspapers and blogs I find it simply amazing how many of the US critics are still saying that United States is simply no longer important enough to the world economy, and that any US crisis will stay within our borders. Thus it almost seems ironic that emerging markets have reacted to the market turbulence in the United States just like they did every time before that- they sold off!!! High beta investments behaved just like they were predicted to do- they fell multiple times more than the market (US) did. Here you go simple advice for all the emerging market junkies- United States was and still is "The Driver" of the world economy and all other economies are still only followers. Could it change some time in the future- surely Yes but not quite yet anyway.

P.S. Today's Fed cut might stop the sell off in the short term but question is how many of the Financial stocks that bounced 20%+ today will actually be around in the next 6 months? My SLO has been definitely well positioned to today's events and hopefully I will prove my critics wrong by using my heavily mortgaged portfolio to jump firmly into the first place of the competition. But here is some bad news- I've been trying to sell almost ALL of my holdings today except for LEND (they will be bought by Lone Star after all I still believe:) because, while I anticipated the sub prime bounce, I certainly recognize that some of the holdings might end up in bankruptcy eventually.

It is prudent to take advantage of opportunities when they present themselves however wrong everyone thinks you are, but it is also important to make sure that the greed does not overrule common sense, and that is precisely why I am getting out of the sub prime game at least for today :)

Trade safely,
Cheers, Vad

Comments: View Comments |  Friday August 17, 2007