Wednesday, October 24, 2007

Don't Know How to make money on M-LEC?

Join the club!

So why spend so much time writing/blogging about it?

The reason that I spent time blogging about M-LEC and SIVs was that these were obscure, interesting, financial structures that were creating market disruptions (dislocations, or whatever other tag you'd like to use).

I focused on them to get a better understanding of how these structures worked and how they would ultimately effect the markets.

While the credit markets have calmed down, there is still some uncertainty. That said, in my opinion the SIV situation is relatively under control.

We still face potential disruptions in the RMBS and CDO markets as variable rate mortgages reset. These will also impact the SIVs.

The timing of these disruptions are somewhat predictable, so I expect that most investors with exposure will use other structured products to hedge their risk.

Undoubtedly there will continue to be problems in the consumer market, and these will filter into the overall economy, but the markets appear to have adjusted for the credit risk (for now).

I'll, therefore, leave the discussion of SIVs and M-LEC to others until there are developments that I think are worth discussion.

Here are two articles from Tuesday's FT that give good descriptions of M-LEC and Citi's SIV exposure and a discussion of the proposed RBS refinancing of the Cheyne Finance SIV.

I will continue to comment on issues that impact the markets and, hopefully, discuss some things that will make money.

I hope that readers will feel free to comment.

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1 comment:

Ben Bittrolff said...

"Don't know how to make money on M-LEC?"

I used the M-LEC announcement as confirmation that 'things are as bad as I thought they were' (or worse) and traded accordingly. Bluntly put, I shorted or added to my short positions.

The fact that M-LEC is being considered means the following:
1) The ABCP market will not rebound quickly on its own.
2) SIVs will not suddenly be able to roll over their debt and avoid fire sales all by themselves.
3) This means that MFX (Mortgage Finance Index) and HXB (Homebuilders Index)still have a long way to fall... and that strength is to be sold.
4) That as long as these are falling XLF (Financial Index) and other financial indices will continue to gravitate towards new lows... despite rate cuts.
5)That ultimately this will pull broader equity indices down as well.
6) ... and last but not least: AS LONG AS THE CREDIT MARKETS CANNOT FUNCTION, no rally in broader equity indices (even tech) is sustainable.

I've got a few posts and charts up illustrating the above points.