March 26, 2009

Global Market Comments
March 26, 2009
Featured Trades: (EEM)

1) There is an easier, cheaper, and faster way to solve the banking crisis which no one is talking about on Capitol Hill.  If collateralized debt obligations (CDO's) are the problem, just get rid of them! Desecuritize them! Just convert them back into the underlying loans. There are $1.4 trillion in CDO's outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations of perhaps 3.7 million loans. Over 68% of the loans backing these bonds are current.  Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50%-80% discounts. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks' balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments or in default can be discounted to maybe 70% because they are still secured by the value of the homes. This would boost the value of the entire asset class from the current 20-50 cents up to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. Of course it would be a massive admin job unwinding the rats' nests behind some of these securities, but Heaven knows there is abundant subprime and Alt-A expertise available for hire these days. Just sift through the ashes of Lehman Brothers and Bear Stearns. It is a workable plan, and therefore is unlikely to ever see the light of day.

2) For Woody Allen's take on the Madoff scandal, look at the Shouts and Murmurs column on page 29 of the March 30 issue of The New Yorker magazine. On learning of the total loss of their life savings, two of his elderly investors die of heart attacks and are reincarnated as two pound lobsters. While sitting in a tank in a Third Avenue restaurant bemoaning their imminent fate with a light butter sauce who walks in for dinner, but Bernie! I'll leave it to you to see how this ends with tears at

3) The one screaming buy out there now are the emerging markets. The US, Europe, and Japan are now committed to spending trillions of dollars to shock the global economy back to life. This is costing the emerging economies nothing, and gives them a free ride back to prosperity. IT turns out that the smaller economies are financially better off than the big ones, with a decade long export boom blessing them with massive foreign exchange reserves and little debt. China, Russia, India, Brazil, and Turkey will be the big beneficiaries. You can buy the specific ETF's for these countries, or go with the generic iShares MSCI Emerging Market ETF (EEM), which has already started to outperform US markets in a big way. It's a once in a century opportunity to buy the highest growth corners of the world's economy at severely knocked down prices.

EEM.png picture by sbronte


'I'd rather consult a trader than a mathematician,' said former Fed chairman Alan Greenspan when considering the best way to assess risk.