A bit of risk management

Well, the Merrill write-offs weren't as bad as feared ("only" $7.9 billion), but earnings were a shocker at -$2.85. Fortunately, Merrills credit rating was downgraded a few hours later, giving investos vital insight in ML's health.

In any event, the merrill news, combined with some truly awful existing home sales data (there's now 10.5 months of inventory in the pipeline) has left risk assets plumbing recent depths. In other words, this doesn't look like any kind of time to be short duration of any description. Macro Man will therefore place a stop on his short TYZ7 position at 111 to stop the bleeding. Any future shorts may well be taken in Bunds, given the hawkish ECB and containment of housing difficulties to Spain and Ireland.
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Anonymous
admin
October 24, 2007 at 6:32 PM ×

I have an interesting question, when you say " Risk assets" what exactly are you meaning ? You seem to mention EMs are risk assets ??

Isn't US equity not a risky one at this point ?;;-)

Also what is ur prognosis (year end targets) for $USD and EM equities ?

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Macro Man
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October 24, 2007 at 8:17 PM ×

Risk assets are essentially anything other than cash or govnerment bonds. Any assumption of credit, equity, or currency risk is by definition risky- hence risk assets!

If I am right on liquidity and the Fed, then the dollar should contin ue to weaken and EM equities should remain firm, albeit with a few roadbumps along the way.

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OldVet
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October 24, 2007 at 11:02 PM ×

Visiting Florida barrier island this month, I can report that investors still don't believe their spec homes are risky assets. My barber advised me to get in while things were still cheap. Theory: risky assets won't decline sharply until the critters are twisting and flopping about with their paw in the beartrap of bankruptcy, and finally they know they have to gnaw risky assets off to get free. :)

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"Cassandra"
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October 25, 2007 at 12:56 AM ×

There is an entire complex of financial and real assets (albeit a thinning one) that is correlated to global liquidity and its continued growth and expansion. It ranges from EM equities at the high-beta side to more or less all equities excepting Japan, Taiwan, maybe UK, and of course US financials, consumer discretionary housing-related stocks; all commodities (except aluminium), all basic industry (steel, commod chems) commodity related stocks and related, (oil, mining, fertilizer, mine machines etc.) Asian domestic reflation, infrastructure and "hard assets (refineries, airports timber etc.), shipping, oil services, and global tech growth. These are all measurably correlated to china and a continuation of the status quo, and their Aug04 Nov05 May&Nov06 Feb&Aug07 swoons and subsequent horny bounces just highlight how knee-jerk and correlated reasonably historically independant stocks. sectors, markets and assset classes have become. This alone should cause onee to look at the nuts&bolts of high asset class covariances with some consternation and ask whether and for how long it will continue. Already real estate has fallen the wayside, as has certain building materials stocks.

One would be forgiven for wondering however if, like a growth stock, whether it will take simply a change in the growth rate of liquidity to kick the sh*t out of the complex, or whether we must wait for something larger (ripping US recession, trade hiccups etc.).

Intensifying speculation in the complex and the dollar as it becomes more obvious will be an obvious casualty in any swoon, as initial value players Isee Buffett on PetroChina) bail incrementally to leveraged specs and the electroic herd of short-term punters, feedback traders, and those who think themselves just too clever by overvaluing public information.

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