Doh!

Let's cover the most important, although obscure news first: the Fed has re-written NationalCity's capital raising deal, according to the WSJ. The rumor is that the Fed rejected an imbedded put option in the deal that would refund Corsair Capital for additional shares sold by NCC under $5.00 in the future. Sounds like the Fed thinks that NCC will be needing to raise more money. I don't know if Corsair can back out now, but it sounds like the Fed just pulled a fast one on them.

When WaMu or Wachovia go back to the trough, there may not be any suckers left. The banks have raised almost unimaginable amounts of capital, but that capital is becoming harder and harder to raise. Soon the banks will be at the end of the rope. We will have a lot more IndyMac Banks before this is over.

With the Dow falling 236 today, I'm thinking that I shouldn't have cashed in my shorts so quickly! No matter, can't get greedy here. I'm still highly leveraged, but in much less volatile positions. Forex and bonds now account for about 100% of portfolio value. Leverage is still about 2x, but volatility should be down as I wait for some good opportunities. In the meantime, with so much short interest in the market, I'm thinking more and more about waiting for a decent bounce and a return to VIX <>

While we could have a little bear market bounce soon, the banking sector just looks worse and worse long term. Fannie Mae is a disaster, although their bonds have pared spreads from 1.45% over 30-yr T's to 1.30% over the past few days. They just paid the highest spread ever (0.74%) over 2-yr. T's for short term funding. This will absolutely cause mortgage rates to rise, possibly to 7+% by the end of the year.

Oh, No! But what if I want to buy a house? Does that mean I need to buy now, before rates go up? No. The housing market is so weak that any increase in mortgage payments due to higher interest will be more than made up for in additional price discounts. Wait. Especially if you are in California.