Wednesday, January 28, 2009

A quick clarification

I've received a lot of questions regarding my last post, and I think I should better clarify what I am saying.

To put it succinctly, I still strongly believe we are in a worsening recession which will last the rest of the year. Unemployment will still get worse, earnings will still get worse, GDP will get worse, and equities have a lot of room to fall (you should see what a joke analysts estimates STILL are for S&P 500 earnings).

The reason I am closing my short positions is that next week the President - and no doubt his economic team with Larry Summers standing behind him - are going to make a significant announcement regarding the entire financial structure of the United States of America, and I have little idea what that announcement will be. It could be the right thing to do - which is that we are nationalizing the banks at the expense of the equity holders - but I put a 95% chance on it being the wrong thing, which is that we're going to purposely overpay for toxic crap which will never be paid back. In that case, the worst stocks of insolvent companies will no longer be insolvent as they now have zero risk. Any profits they make are kept by rich shareholders and any losses they have are paid for by me and my future children.

The larger point I am making is that government is constantly changing the rules, and I have no idea what the rules will be in the future. Thus, I cannot make an intelligent investment decision. I want to make sure this is being framed properly: I'm not trying to make a short one-week trade play. I don't do trades, I do investments. I am just out of the market at least until this enormous game-changing decision is announced.

I'll leave you with an excerpt from one of my closest friends, Nemo:

So, the people who made loans to the banks, voluntarily taking on the risk of default, will be made whole at taxpayer expense. The shareholders, who nominally took on even more risk, will reap the profits at taxpayer expense. Sure, the Obama Administration will slap a few executives on the wrist and block the purchase of a private jet or two, because those are things the average person might actually notice and understand. But in the big picture, this is a straight transfer of wealth from you and your descendants to our largest financial institutions.

Did the executives at these banks get wind of this ahead of time? Well, let’s see. Bank of America executives have been purchasing millions of dollars of their own stock in the past two weeks. Jamie Dimon purchased $11.5 million of JPMorgan stock a week and a half ago. So I would have to say “yes”. Behold your tax dollars at work.

If you're interested in finance and economics, I highly suggest you read his blog on a regular basis. The man is brilliant. In fact I would venture to guess that any reader who does will probably start reading him rather than me.

No comments: