I find it terrible and I must say I tip my hat to the brave people seeing this Citibank bail-out as something positive.
Looking at the lead into this week-end it seems Citi's DTA, or more precisely their 'Deferred Tax Asset' was the key issue - being more than 19% (vs. maximum ceiling of 10% of Tier 1 capital)....and 80% of all their tangible assets. I am not tax or accountant specialist but from what I read and being told Citi's Tier 1 capital was mostly........fantasy.... DTA can only be used as capital if expected to be used inside one year - Citi is hardly going to start making money inside this year, next, or even the next five years!
More troublesome for me being, I doubt C is alone using this arcane way of creating Tier 1 capital.
Hence despite being happy for my friends at Citi being saved(for now). I remain extremely bearish on financial stocks especially considering the new Mr. Dirigisme of America: Incoming Treasury Secretary Geithner, seems more than willing to "force" banks to comply with his and his Masters agenda. In other words: Bernanke is bad, Greenspan the worst, but the new Mr. G. looks, sounds and smells a lot like the old guys.
Having learned his craft with Kissinger, Greenspan and Summers it is hardly a surprise he does not represent change but rather mirrors his Master left-leaning interventionist agenda, which I understand from US electorate point of view, but one I can not recommend, not that anyone cares about my opinion in these "small matters". Mind you I will be in the US next week to take a more close look on things in New York and Alabama.
The Investment Committee remained at 75% cash- We clearly see some signs of oversold and crisis fatique, but the with volatility of VIX bigger than 80% the market has simply become one big lottery ticket, where you need 80 pct luck and 20 pct guts rather than models or even rational behavior.
The three driving premises for our research remains:
- Cost of funding drives market and valuations
- Price of liquidity new unknown (tax on money)
- No prior analogy historically will work (because this is different, very different)
We note the markets are extremely oversold but we also find it hard to find ANY economic reasoning for turning positive or even neutral on the markets.
The 25% invested is being changed around slightly - we have abandon our short Gold, and we recognize our long TIPS not exactly on the roll, on the other hand our long Government Fixed Income and cash still makes our portfolio massively outperform our alternative models - at least for now.
We reached our minimum target of 765.00 and we are in the process of looking for new targets -We stick with a simple S&P500 in 500 -
Looking into 2009 we are preparing ourselves for furher deleveraging - it seems to us the world, slowly, very slowly is figuring out why this credit creation not only was excessive but also directly damaging for long-term growth and behaviour.
We see credit spreads and mortgage spreads widen further into month-end and certainly into year-end - this will become the negative gravity of the markets, while the oversoldness will be the postive force.
Strategy:
We are almost back to neutral:
FX: short NZD (1 month option put) , small short EURUSD from here (1.2892) - we are looking to buy EURDKK again as we do not see Denmark escaping the Norway/Sweden turmoil in environment of widening spreads across all fixed income classes.
EQ: We sold into the close today @ 851.00 ( 1/2 ATR stop)... long STOXX50 puts...
COM: We were long Gold puts now worthless...
We will watch the market for opportunistic moves, but we are in game of protecting our relative ok year rather than being aggressive - as said, this market is for gamblers not investors or even traders.
Be safe and must Dirigisme go away,
Steen
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