Work to do Next Week

The following passage is from Satyajit Das, emailed to me today:

The excesses of the CDS market are evident in the recent interest in contracts protecting against the default of a sovereign (known as sovereign CDS). For example, the CDS market for sovereign debt is increasingly pricing in increased funding costs for the US. The fee for hedging against
losses on $10 million of Treasuries currently peaked at about 1.00% pa for
10 years (equivalent to $100,000 annually). This is an increase from 0.01% pa ($1,000) in 2007.

The specter of banks, some of whom have needed capital injections and liquidity support from governments to ensure their own survival, offering to insure other market participants against the risk of default of sovereign government (sometimes their own) is surreal.

The unpalatable reality that very few, self interested industry participants are prepared to admit is that much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency. The process was entirely deliberate. Efficiency and transparency are not consistent with the high profit margins that are much sought after on Wall Street. Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents.

The last paragraph I have put in bold print, because it is exactly how the Wall Street works.

As far as my own portfolio goes, I need to do something. I've lost all my profit for the year. First thing to go is the bonds. I'm afraid that the fact that the Fed is buying means that the tide is going against the bonds. Also, with the way central banks around the world are printing, it looks like gold is good. However, if the flight to safety tapers off, then gold may have problems as well. I've got to get rid of SDS. The COF short went against me in an ugly way on Thursday, but COF is a credit card story. They won't really benefit from mark-to-make believe, as they will still have to post losses based on write-offs. I don't think their credit card receivables were marked to market to begin with, but I may be wrong. Maybe I'll even short the ultrashort financials SKF. Ooops... too late. It's down to a 52 wk low of $65 from $303. Missed the boat on that one.

On the other hand, if everything's been going against me, then maybe it's all part of the market rally. But then again, the market rally might go on some more. Well, I've got to pull back on the leverage, and that means that at least the bonds must go.